Are Financial Constraints Priced? Evidence from Textual Analysis

We construct novel measures of financial constraints using textual analysis of firms’ annual reports and investigate their impact on stock returns. Our three measures capture access to equity markets, debt markets, and external financial markets in general. In all cases, constrained firms earn highe...

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Bibliographic Details
Published in:The Review of financial studies 2018-07, Vol.31 (7), p.2693-2728
Main Authors: Buehlmaier, Matthias M. M., Whited, Toni M.
Format: Article
Language:English
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Summary:We construct novel measures of financial constraints using textual analysis of firms’ annual reports and investigate their impact on stock returns. Our three measures capture access to equity markets, debt markets, and external financial markets in general. In all cases, constrained firms earn higher returns, which move together and cannot be explained by the Fama and French (2015) factor model. A trading strategy based on financial constraints is most profitable for large, liquid stocks. Our results are strongest when we consider debt constraints. A portfolio based on this measure earns an annualized risk-adjusted excess return of 6.5%.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhy007