The impact of heterogenous financial shocks on asset prices and corporate decisions

We investigate the link between equity and debt financing shocks and aggregate risk, and their implications for asset prices and corporate decisions in the cross-section. Using micro moments, we measure the aggregate shocks to firms' equity and debt issuances as the unexpected change in the fractions of firms issuing equity and debt in the cross-section, after accounting for standard observable proxies that influence firm's issuance activity. An asset pricing model that includes these two financial shocks and the market factor prices the cross-section of stock returns well, and helps rationalize the empirical success of some popular asset pricing factors such as the investment, the momentum, and, to a lesser extent, the profitability factors. We investigate potential economic mechanisms driving the results and show that issuance shocks are more likely driven by aggregate disturbances that influence firms' marginal issuance costs, which in turn affects both the equilibrium stochastic discount factor, and firms' cash flows.