Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-03T01:33:01.770Z Has data issue: false hasContentIssue false
  • English
  • Français

Stock Comovement and Financial Flexibility

Published online by Cambridge University Press:  24 November 2022

Teng Huang ,
Anil Kumar ,
Stefano Sacchetto Open the ORCID record for Stefano Sacchetto [Opens in a new window]  and
Carles Vergara-Alert
Teng Huang
Affiliation:
Luiss Guido Carli University, Department of Economics and Finance [email protected]
Anil Kumar
Affiliation:
Aarhus University, Department of Economics and Business Economics; Danish Finance Institute (DFI) [email protected]
Stefano Sacchetto*
Affiliation:
IESE Business School, Financial Management Department
Carles Vergara-Alert
Affiliation:
IESE Business School, Financial Management Department [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We develop a dynamic model of corporate investment and financing, in which shocks to the value of collateralizable assets generate variation in firms’ debt capacity. We show that the degree of similarity among firms’ financial flexibility forecasts cross-sectional variation in return correlation. We test the implications of the model with firm-level data in two empirical analyses using i) an instrumental variable approach based on shocks to the value of collateralizable corporate assets and ii) the outbreak of the COVID-19 crisis as an event study. We find that firms in the same percentile of the cross-sectional distribution of financial flexibility have 62% higher correlation in stock-return residuals than firms 50 percentiles apart.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 3 , May 2024 , pp. 1141 - 1184
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to Tom Aabo, Miguel Antón, Bent Jesper Christensen, Raffaele Corvino, Christian Eufinger, Santiago Forte, Ivan Julio, Thomas Matthys, Hannes Mohrschladt, Albert Saiz, Hélène Sicotte, Jim Stevens, and participants at the 2021 AFFI conference, the 2019 FMA conference, the 2019 PFMC conference, the 2019 Danish Finance Institute conference, the 2019 Spanish Finance Forum, the 2019 AREUEA International conference, the 2019 American Real Estate Society meeting, the 2018 Corporate Finance Day at the University of Antwerp, the 2018 ERES meeting, and at seminars at CUNEF, IILM University, and Swansea University. We thank Dirk Hackbarth (the referee) and Jarrad Harford (the editor) for their helpful comments. Kumar gratefully acknowledges support from the Danish Finance Institute (DFI) and Aarhus University Research Foundation (AUFF-E-2017-7-10). Sacchetto acknowledges financial support from the AXA Research Fund and the Social Trends Institute (STI), AGAUR (Ref: 2017-SGR-1244), and AEI (ECO2017-84016-P AEI/FEDER, EU, and PID2020-115069GB-I00/AEI/10.13039/501100011033) from the Spanish Ministry of Science, Innovation and Universities (MICINN). Vergara-Alert acknowledges the financial support of the State Research Agency of the MICINN (Ref. PGC2018-097335-A-I00 MCIU/AEI/FEDER, EU), and the Ministry of Economy and Competitiveness (Ref. ECO2015-63711-P). All remaining errors are our responsibility.

References

Albuquerque, R.; Koskinen, Y.; Yang, S.; and Zhang, C.. “Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash.” Review of Corporate Finance Studies, 9 (2020), 593–621.CrossRefGoogle Scholar
Almazan, A.; De Motta, A.; Titman, S.; and Uysal, V.. “Financial Structure, Acquisition Opportunities, and Firm Locations.” Journal of Finance, 65 (2010), 529–563.CrossRefGoogle Scholar
Almeida, H., and Campello, M.. “Financial Constraints, Asset Tangibility, and Corporate Investment.” Review of Financial Studies, 20 (2007), 1429–1460.CrossRefGoogle Scholar
Antón, M., and Polk, C.. “Connected Stocks.” Journal of Finance, 69 (2014), 1099–1127.CrossRefGoogle Scholar
Asness, C. S.; Frazzini, A.; and Pedersen, L. H.. “Quality Minus Junk.” Review of Accounting Studies, 24 (2019), 34–112.CrossRefGoogle Scholar
Barberis, N., and Shleifer, A.. “Style Investing.” Journal of Financial Economics, 68 (2003), 161–199.CrossRefGoogle Scholar
Barberis, N.; Shleifer, A.; and Wurgler, J.. “Comovement.” Journal of Financial Economics, 75 (2005), 283–317.CrossRefGoogle Scholar
Belo, F.; Lin, X.; and Yang, F.. “External Equity Financing Shocks, Financial Flows, and Asset Prices.” Review of Financial Studies, 32 (2018), 3500–3543.CrossRefGoogle Scholar
Bernanke, B., and Gertler, M.. “Agency Costs, Net Worth, and Business Fluctuations.” American Economic Review, 79 (1989), 14–31.Google Scholar
Boyer, B. H. “Style-Related Comovement: Fundamentals or Labels?” Journal of Finance, 66 (2011), 307–332.CrossRefGoogle Scholar
Buffa, A. M., and Hodor, I.. “Institutional Investors, Heterogeneous Benchmarks and the Comovement of Asset Prices.” Journal of Financial Economics, 147 (2023), 352–381.CrossRefGoogle Scholar
Campello, M.; Graham, J. R.; and Harvey, C. R.. “The Real Effects of Financial Constraints: Evidence from a Financial Crisis.” Journal of Financial Economics, 97 (2010), 470–487.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Carlson, M.; Fisher, A.; and Giammarino, R.. “Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns.” Journal of Finance, 59 (2004), 2577–2603.CrossRefGoogle Scholar
Catherine, S.; Chaney, T.; Huang, Z.; Sraer, D.; and Thesmar, D.. “Quantifying Reduced-Form Evidence on Collateral Constraints.” Journal of Finance, 77 (2022), 2143–2181.CrossRefGoogle Scholar
Chaney, T.; Sraer, D.; and Thesmar, D.. “The Collateral Channel: How Real Estate Shocks Affect Corporate Investment.” American Economic Review, 102 (2012), 2381–2409.CrossRefGoogle Scholar
Chen, H.; Singal, V.; and Whitelaw, R. F.. “Comovement Revisited.” Journal of Financial Economics, 121 (2016), 624–644.CrossRefGoogle Scholar
Chen, T.; Harford, J.; and Lin, C.. “Financial Flexibility and Corporate Cash Policy.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2938306 (2017).Google Scholar
Chordia, T.; Goyal, A.; and Tong, Q.. “Pairwise Correlations.” Working Paper, Singapore Management University (2011).CrossRefGoogle Scholar
Claessens, S., and Yafeh, Y.. “Comovement of Newly Added Stocks with National Market Indices: Evidence from Around the World.” Review of Finance, 17 (2013), 203–227.CrossRefGoogle Scholar
Cooper, I. “Asset Pricing Implications of Nonconvex Adjustment Costs and Irreversibility of Investment.” Journal of Finance, 61 (2006), 139–170.CrossRefGoogle Scholar
Cvijanović, D. “Real Estate Prices and Firm Capital Structure.” Review of Financial Studies, 27 (2014), 2690–2735.CrossRefGoogle Scholar
Davidoff, T. “Supply Constraints Are Not Valid Instrumental Variables for Home Prices Because They Are Correlated with Many Demand Factors.” Critical Finance Review, 5 (2016), 177–206.CrossRefGoogle Scholar
Davis, S. J.; Hansen, S.; and Seminario-Amez, C.. “Firm-Level Risk Exposures and Stock Returns in the Wake of COVID-19.” Working Paper, University of Chicago (2021).CrossRefGoogle Scholar
De Bodt, E.; Eckbo, B. E.; and Roll, R. W.. “Competition Shocks, Rival Reactions, and Return Comovement.” Working Paper, Dartmouth College (2022).Google Scholar
De Vito, A., and Gómez, J.-P.. “Estimating the COVID-19 Cash Crunch: Global Evidence and Policy.” Journal of Accounting and Public Policy, 39 (2020), 1–14.CrossRefGoogle Scholar
DeMarzo, P. M.; Kaniel, R.; and Kremer, I.. “Diversification as a Public Good: Community Effects in Portfolio Choice.” Journal of Finance, 59 (2004), 1677–1716.CrossRefGoogle Scholar
Ding, W.; Levine, R.; Lin, C.; and Xie, W.. “Corporate Immunity to the COVID-19 Pandemic.” Journal of Financial Economics, 141 (2021), 802–830.CrossRefGoogle ScholarPubMed
Dixit, A. K., and Pindyck, R. S.. Investment Under Uncertainty. Princeton: Princeton University Press (1994).CrossRefGoogle Scholar
Duchin, R.; Ozbas, O.; and Sensoy, B. A.. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis.” Journal of Financial Economics, 97 (2010), 418–435.CrossRefGoogle Scholar
Eun, C. S.; Wang, L.; and Xiao, S. C.. “Culture and R 2.” Journal of Financial Economics, 115 (2015), 283–303.CrossRefGoogle Scholar
Fahlenbrach, R.; Rageth, K.; and Stulz, R. M.. “How Valuable Is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis.” Review of Financial Studies, 34 (2021), 5474–5521.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 1–22.CrossRefGoogle Scholar
Frazzini, A., and Pedersen, L. H.. “Betting against Beta.” Journal of Financial Economics, 111 (2014), 1–25.CrossRefGoogle Scholar
Gan, J. “Collateral, Debt Capacity, and Corporate Investment: Evidence from a Natural Experiment.” Journal of Financial Economics, 85 (2007), 709–734.CrossRefGoogle Scholar
Geltner, D.; Miller, N. G.; Clayton, J.; and Eichholtz, P.. Commercial Real Estate Analysis and Investments. Mason, OH: South-Western (2001).Google Scholar
Gomes, J. F., and Schmid, L.. “Levered Returns.” Journal of Finance, 65 (2010), 467–494.CrossRefGoogle Scholar
Green, T. C., and Hwang, B.-H.. “Price-Based Return Comovement.” Journal of Financial Economics, 93 (2009), 37–50.CrossRefGoogle Scholar
Greenwood, R. “Excess Comovement of Stock Returns: Evidence from Cross-Sectional Variation in Nikkei 225 Weights.” Review of Financial Studies, 21 (2008), 1153–1186.CrossRefGoogle Scholar
Greenwood, R. M., and Sosner, N.. “Trading Patterns and Excess Comovement of Stock Returns.” Financial Analysts Journal, 63 (2007), 69–81.CrossRefGoogle Scholar
Grieser, W.; Lee, J. H.; and Zekhnini, M.. “Ubiquitous Comovement.” Working Paper, Michigan State University (2020).CrossRefGoogle Scholar
Hackbarth, D., and Johnson, T.. “Real Options and Risk Dynamics.” Review of Economic Studies, 82 (2015), 1449–1482.CrossRefGoogle Scholar
Hackbarth, D.; Miao, J.; and Morellec, E.. “Capital Structure, Credit Risk, and Macroeconomic Conditions.” Journal of Financial Economics, 82 (2006), 519–550.CrossRefGoogle Scholar
Harvey, C. R.; Liu, Y.; and Zhu, H.. “…and the Cross-Section of Expected Returns.” Review of Financial Studies, 29 (2016), 5–68.CrossRefGoogle Scholar
Hennessy, C. A., and Whited, T. M.. “How Costly Is External Financing? Evidence from a Structural Estimation.” Journal of Finance, 62 (2007), 1705–1745.CrossRefGoogle Scholar
Himmelberg, C.; Mayer, C.; and Sinai, T.. “Assessing High House Prices: Bubbles, Fundamentals and Misperceptions.” Journal of Economic Perspectives, 19 (2005), 67–92.CrossRefGoogle Scholar
Jermann, U., and Quadrini, V.. “Macroeconomic Effects of Financial Shocks.” American Economic Review, 102 (2012), 238–271.CrossRefGoogle Scholar
Kiyotaki, N., and Moore, J.. “Credit Cycles.” Journal of Political Economy, 105 (1997), 211–248.CrossRefGoogle Scholar
Kumar, A., and Lee, C. M.. “Retail Investor Sentiment and Return Comovements.” Journal of Finance, 61 (2006), 2451–2486.CrossRefGoogle Scholar
Kumar, A.; Page, J. K.; and Spalt, O. G.. “Investor Sentiment and Return Comovements: Evidence from Stock Splits and Headquarters Changes.” Review of Finance, 17 (2013), 921–953.CrossRefGoogle Scholar
Kumar, A., and Vergara-Alert, C.. “The Effect of Financial Flexibility on Payout Policy.” Journal of Financial and Quantitative Analysis, 55 (2020), 263–289.CrossRefGoogle Scholar
Lamont, O. “Cash Flow and Investment: Evidence from Internal Capital Markets.” Journal of Finance, 52 (1997), 83–109.CrossRefGoogle Scholar
Leland, H. E. “Corporate Debt Value, Bond Covenants, and Optimal Capital Structure.” Journal of Finance, 49 (1994), 1213–1252.CrossRefGoogle Scholar
Ling, D., and Archer, W.. Real Estate Principles: A Value Approach. New York: McGraw-Hill Higher Education (2012).Google Scholar
Liu, Z.; Wang, P.; and Zha, T.. “Land-Price Dynamics and Macroeconomic Fluctuations.” Econometrica, 81 (2013), 1147–1184.Google Scholar
Livdan, D.; Sapriza, H.; and Zhang, L.. “Financially Constrained Stock Returns.” Journal of Finance, 64 (2009), 1827–1862.CrossRefGoogle Scholar
Lustig, H. N., and Van Nieuwerburgh, S. G.. “Housing Collateral, Consumption Insurance, and Risk Premia: An Empirical Perspective.” Journal of Finance, 60 (2005), 1167–1219.CrossRefGoogle Scholar
McDonald, R., and Siegel, D.. “The Value of Waiting to Invest.” Quarterly Journal of Economics, 101 (1986), 707–727.CrossRefGoogle Scholar
Mian, A., and Sufi, A.. “House Prices, Home Equity–Based Borrowing, and the US Household Leverage Crisis.” American Economic Review, 101 (2011), 2132–2156.CrossRefGoogle Scholar
Modigliani, F., and Miller, M. H.. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review, 48 (1958), 261–297.Google Scholar
Nozawa, Y., and Qiu, Y.. “Corporate Bond Market Reactions to Quantitative Easing during the COVID-19 Pandemic.” Journal of Banking & Finance, 133 (2021), 1–20.CrossRefGoogle ScholarPubMed
Pindyck, R. S., and Rotemberg, J. J.. “The Comovement of Stock Prices.” Quarterly Journal of Economics, 108 (1993), 1073–1104.CrossRefGoogle Scholar
Pirinsky, C., and Wang, Q.. “Does Corporate Headquarters Location Matter for Stock Returns?” Journal of Finance, 61 (2006), 1991–2015.CrossRefGoogle Scholar
Quan, D. C., and Titman, S.. “Commercial Real Estate Prices and Stock Market Returns: An International Analysis.” Financial Analysts Journal, 53 (1997), 21–34.CrossRefGoogle Scholar
Raffestin, L. “Do Bond Credit Ratings Lead to Excess Comovement?” Journal of Banking & Finance, 85 (2017), 41–55.CrossRefGoogle Scholar
Ramelli, S., and Wagner, A. F.. “Feverish Stock Price Reactions to COVID-19.” Review of Corporate Finance Studies, 9 (2020), 622–655.CrossRefGoogle Scholar
Saiz, A. “The Geographic Determinants of Housing Supply.” Quarterly Journal of Economics, 125 (2010), 1253–1296.CrossRefGoogle Scholar
Strebulaev, I. A. “Do Tests of Capital Structure Theory Mean What They Say?” Journal of Finance, 62 (2007), 1747–1787.CrossRefGoogle Scholar
Strebulaev, I. A., and Whited, T. M.. “Dynamic Models and Structural Estimation in Corporate Finance.” Foundations and Trends in Finance, 6 (2012), 1–163.CrossRefGoogle Scholar
Tuzel, S. “Corporate Real Estate Holdings and the Cross-Section of Stock Returns.” Review of Financial Studies, 23 (2010), 2268–2302.CrossRefGoogle Scholar
Vijh, A. M. “S&P 500 Trading Strategies and Stock Betas.” Review of Financial Studies, 7 (1994), 215–251.CrossRefGoogle Scholar
Zhang, L. “The Value Premium.” Journal of Finance, 60 (2005), 67–103.CrossRefGoogle Scholar
Supplementary material: PDF

Huang et al. supplementary material

Huang et al. supplementary material

Download Huang et al. supplementary material(PDF)
PDF 312 KB