http://finance.martinsewell.com/stylized-facts/volatility/Andersen-etal2001a.pdf

The distribution of realized stock return volatility

We collect detailed qualitative information from financial filings to categorize financial constraints for a random sample of firms from 1995 to 2004. Using this categorization, we estimate ordered logit models predicting constraints as a function of different quantitative factors. Our findings cast serious doubt on the validity of the KZ index as a measure of financial constraints, while offering mixed evidence on the validity of other common measures of constraints. We find that firm size and age are particularly useful predictors of financial constraint levels, and we propose a measure of financial constraints that is based solely on these firm characteristics.

New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index

We investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to (1) reduced agency costs due to enhanced stakeholder engagement and (2) reduced informational asymmetry due to increased transparency. Using a large cross-section of firms, we find that firms with better CSR performance face significantly lower capital constraints. We provide evidence that both better stakeholder engagement and transparency around CSR performance are important in reducing capital constraints. The results are further confirmed using several alternative measures of capital constraints, a paired analysis based on a ratings shock to CSR performance, an instrumental variables approach, and a simultaneous equations approach. Finally, we show that the relation is driven by both the social and environmental dimension of CSR. Copyright © 2013 John Wiley & Sons, Ltd.

/pdf/corporate-social-responsibility-and-access-to-finance-1orjkr32qr.pdf

Corporate social responsibility and access to finance

We collect detailed qualitative information from financial filings to categorize financial constraints for a random sample of firms from 1995 to 2004. Using this categorization, we estimate ordered logit models predicting constraints as a function of different quantitative factors. Our findings cast serious doubt on the validity of the KZ index as a measure of financial constraints, while offering mixed evidence on the validity of other common measures of constraints. We find that firm size and age are particularly useful predictors of financial constraint levels, and we propose a measure of financial constraints that is based solely on these firm characteristics. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

This paper proposes a new generalized autoregressive conditionally heteroskedastic (GARCH) process, the asymmetric generalized dynamic conditional correlation (AG-DCC) model The AG-DCC process extends previous specifications along two dimensions: it allows for series-specific news impact and smoothing parameters and permits conditional asymmetries in correlation dynamics The AG-DCC specification is well suited to examine correlation dynamics among different asset classes and investigate the presence of asymmetric responses in conditional variances and correlations to negative returns We employ the AG-DCC model to analyze the behavior of international equities and government bonds While equity returns show strong evidence of asymmetries in conditional volatility, little is found for bond returns However, both equities and bonds exhibit asymmetries in conditional correlations, with equities responding stronger than bonds to joint bad news The article also finds that, during periods of financial turmoil, equity market volatilities show important linkages, and conditional equity correlations among regional groups increase dramatically Furthermore, in January 1999 with the introduction of the euro, we document significant evidence of a structural break in correlation although not in

/pdf/asymmetric-dynamics-in-the-correlations-of-global-equity-and-1zhlal3wdu.pdf

Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns

We construct an index of firms’ external finance constraints via generalized method of moments (GMM) estimation of an investment Euler equation. Unlike the commonly used KZ index, ours is consistent with firm characteristics associated with external finance constraints. Constrained firms’ returns move together, suggesting the existence of a financial constraints factor. This factor earns a positive but insignificant average return. Much of the variation in this factor cannot be explained by the Fama–French and momentum factors. Cross-sectional regressions of returns on our index and other firm characteristics show that constrained firms earn higher returns and that the financial-constraints effect dominates the size effect. We explore the impact of firms’ external finance constraints on their stock returns. Motivation for this inquiry starts with a large body of microeconometric studies that have provided some evidence of an impact of external finance constraints on investment. For example, Whited (1992), Bond and Meghir (1994), and Love (2003) show that augmentations of an investment Euler equation that account for financial constraints improve its fit. The question remains whether these effects are priced in asset markets. In other words, do financial constraints affect asset returns; and if so, is this risk diversifiable? To tackle this question, we construct an index of financial constraints based on a standard intertemporal investment model augmented to account for financial frictions. The model predicts that external finance constraints affect the intertemporal substitution of investment today for investment tomorrow via the shadow value of scarce external funds. This shadow value in turn depends on observable variables. Generalized method of moments (GMM) estimation of the model provides fitted values of the shadow value, which we then use as our index. The most important advantage of this approach is its avoidance of serious sample selection, simultaneity, and measurement-error problems via structural

/pdf/financial-constraints-risk-2u79oj3itd.pdf

Financial Constraints Risk

It appears that volatility in equity markets is asymmetric: returns and conditional volatility are negatively correlated. We provide a unified framework to simultaneously investigate asymmetric volatility at the firm and the market level and to examine two potential explanations of the asymmetry: leverage effects and time-varying risk premiums. Our empirical application uses the market portfolio and portfolios with different leverage constructed from Nikkei 225 stocks, extending the empirical evidence on asymmetry to Japanese stocks. Although volatility asymmetry is present and significant at the market and the portfolio levels, its source differs across portfolios. We find that it is important to include leverage ratios in the volatility dynamics but that their economic effects are mostly dwarfed by the volatility feedback mechanism. Volatility feedback is enhanced by a phenomenon that we term covariance asymmetry: conditional covariances with the market increase only significantly following negative market news. We do not find significant asymmetries in conditional betas.

Asymmetric Volatility and Risk in Equity Markets

It appears that volatility in equity markets is asymmetric: returns and conditional volatility are negatively correlated We provide a unified framework to simultaneously investigate asymmetric volatility at the firm and the market level and to examine two potential explanations of the asymmetry: leverage effects and volatility feedback Our empirical application uses the market portfolio and portfolios with different leverage constructed from Nikkei 225 stocks We reject the pure Ž leverage model of Christie 1982 and find support for a volatility feedback story Volatility feedback at the firm level is enhanced by strong asymmetries in conditional covariances Conditional betas do not show significant asymmetries We document the risk premium implications of these findings

/pdf/asymmetric-volatility-and-risk-in-equity-markets-3xazlaizxa.pdf

Asymmetric volatility and risk in equity markets

Using a novel information asymmetry index based on measures of adverse selection developed by the market microstructure literature, we test if information asymmetry is an important determinant of capital structure decisions, as suggested by the pecking order theory. Our index relies exclusively on measures of the market's assessment of adverse selection risk rather than on ex ante firm characteristics. We find that information asymmetry does affect the capital structure decisions of U.S. firms over the sample period 1973-2002. Our findings are robust to controlling for conventional leverage factors (size, Q ratio, tangibility, profitability) and several firm attributes, such as funding needs, sales growth, real investment, stock return volatility, stock turnover, and intensity of insider trading. For example, we estimate that on average, for every dollar of financing deficit to cover, firms in the highest adverse selection decile issue 30 cents of debt more than firms in the lowest decile. Overall, this evidence explains why the pecking order theory is only partially successful in explaining all of firms' capital structure decisions. It also suggests that the theory finds support when its basic assumptions hold in the data, as it should reasonably be expected of any theory.

/pdf/does-asymmetric-information-drive-capital-structure-4bkrbpzy4f.pdf

Does Asymmetric Information Drive Capital Structure Decisions

We construct an index of firms' external finance constraints via GMM estimation of an investment Euler equation. Unlike the commonly used KZ index, ours is consistent with firm characteristics associated with external finance constraints. Constrained firms' returns move together, suggesting the existence of a financial constraints factor. This factor earns a positive but insignificant average return. Much of the variation in this factor cannot be explained by the Fama-French and momentum factors. Cross-sectional regressions of returns on our index and other firm characteristics show that constrained firms earn higher returns and that the financial-constraints effect dominates the size effect.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1999489_code110359.pdf?abstractid=410816&type=2

Guojun Wu

Papers

Financial Constraints Risk

Asymmetric Volatility and Risk in Equity Markets

Asymmetric volatility and risk in equity markets

Does Asymmetric Information Drive Capital Structure Decisions

Financial Constraints Risk