Equity Financing Risk
62 Pages Posted: 12 Jun 2020 Last revised: 24 Jun 2022
There are 2 versions of this paper
Equity Financing Risk
Date Written: May, 2020
Abstract
A risk factor linked to aggregate equity issuance conditions explains the empirical performance of investment factors based on the asset growth anomaly of Cooper, Gulen, and Schill (2008). This new risk factor, dubbed equity financing risk (EFR) factor, subsumes investment factors in leading linear factor models. Most importantly, when substituted for investment factors, the EFR factor improves the overall pricing performance of linear factor models, delivering a significant reduction in absolute pricing errors and their associated t-statistics for several anomalies, including the ones related to R&D expenditures and cash-based operating profitability.
Keywords: Equity returns, R&, D, Factor models, equity issuances, Financing constraints
JEL Classification: G12, G31, G35
Suggested Citation: Suggested Citation