Financial frictions and cross-sectional stock returns

Abstract

The first chapter develops a quantitative general equilibrium model with heterogeneous firms and financial constraints to study the implications of the leased versus owned capital on the cross-section of stock returns. The model predicts that the leased capital is \textit{less} risky than the owned capital, because the risk of capital price fluctuations is borne by the lessor, the owner of the capital, but not the lessee. I provide strong empirical evidence to support the above prediction. I create a novel leased capital ratio measure for the fraction of the leased capital with respect to the total physical capital used in firm production. Among financially constrained firms, there is a large dispersion in firms' leased capital ratio. Firms with a low leased capital ratio earn average returns that are 6.43\% higher than firms with a high leased capital ratio. My model quantitatively accounts for the negative leased capital premium.

The second chapter studies the implications of credit market frictions for the cross-sectional stock returns. In macroeconomic literatures of credit market frictions, prior studies imply the countercyclicality of tightness in financial constraints, and focus on the borrowing capacity of tangible capital. Indeed, intangible capital is pledgeable and facilitates to ease such constraints, providing insurance against aggregate shocks. Firms use more redeplyable intanible capital to assess capital as a channel of off-balanced sheet financing when they have no access to debt or equity financing. My empirical evidence is coherent with the theoretical prediction by sorting firms's pledgeable intangibility. As a result, low pledgeability firms are subject to higher aggregate shocks driven by business cycle fluctuations and are expected to provide higher risk premia. A long-short portfolio constructed from firms with low and high intangible pledgeability ratio cannot be explained by existing risk factors. Firms with a low pledgeability ratio earn average returns that are 8.8\% higher than firms with a high pledgeability ratio.