Financial Constraints and Stock Returns

We test whether the impact of financial constraints on firm value is observable in asset returns. We form portfolios of firms based on observable characteristics related to financial constraints, and test for common variation in the stock returns of these firms. Financially constrained firms' stock returns move together over time. Constrained firms have low returns in our sample of growing manufacturing firms in 1968-1997. We find little evidence that the relative performance of financially constrained firms reflects monetary policy, credit conditions, or business cycles