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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 thuang@luiss.it
Anil Kumar
Affiliation:
Aarhus University, Department of Economics and Business Economics; Danish Finance Institute (DFI) akumar@econ.au.dk
Stefano Sacchetto*
Affiliation:
IESE Business School, Financial Management Department
Carles Vergara-Alert
Affiliation:
IESE Business School, Financial Management Department cvergara@iese.edu
*
ssacchetto@iese.edu (corresponding author)
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Abstract

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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 , First View , pp. 1 - 44
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.

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