“How Do Financing Constraints Affect Firms’ Equity Volatility?” by Daniel Carvalho
Finance Seminar
Author:
Daniel Carvalho
University of South California
This paper provides evidence that relaxed financing constraints can be an important determinant of higher levels of firm stock return volatility among U.S. firms. To identify this effect, the analysis examines the impact of persistent shocks to the value of firms’ tangible assets (real estate holdings) on their equity volatility. The analysis is based on an instrumental variables approach and addresses the concern that these shocks might affect firms’ equity volatility through different channels. The evidence suggests that relaxed financing constraints lead to higher equity volatility by allowing firms to take more advantage of idiosyncratic shocks to growth opportunities. Overall, these results suggest the importance of a specific channel through which firms’ underlying economic fundamentals determine the volatility of their stock returns.
