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A Corporate Financing-Based Asset Pricing Model

Author

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  • Roberto Steri

    (University of Lausanne and Swiss Finance Institute)

Abstract

I show that an asset pricing model for the equity claims of a value-maximizing firm can be constructed from its optimal financial contracting behavior. I study a dynamic contracting model in which firms trade off the costs and benefits of a given promise to pay external lenders in a specific economic state. Deals between firms and financiers reveal the importance of that state for firm's equity value, namely the stochastic discount factor the firm responds to. I empirically evaluate the model in the cross section of expected equity returns. I find that the financial contracting approach goes a long way in rationalizing observed cross-sectional differences in average returns, also in comparison to leading asset pricing models. In addition, the model discloses that two easily measured variables, the growth rates on net worth and profitability, generate sizeable cross-sectional spreads in returns. Finally, a calibrated version of the model is broadly consistent with observed corporate policies of US listed firms.

Suggested Citation

  • Roberto Steri, 2018. "A Corporate Financing-Based Asset Pricing Model," Swiss Finance Institute Research Paper Series 18-46, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1846
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    More about this item

    Keywords

    Dynamic Contracting; Cross Section of Returns; Hedging; Capital Asset Pricing Model; Stochastic Discount Factor.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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