Stock Comovement and Financial Flexibility

Teng Huang; Anil Kumar; Stefano Sacchetto; Carles Vergara-Alert

doi:10.1017/S0022109022001338

Stock Comovement and Financial Flexibility

Teng Huang, Anil Kumar, Stefano Sacchetto, Carles Vergara-Alert

Department of Economics and Business Economics

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Abstract

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.

Original language	English
Journal	Journal of Financial and Quantitative Analysis
Volume	59
Issue	3
Pages (from-to)	1141-1184
Number of pages	44
ISSN	0022-1090
DOIs	https://doi.org/10.1017/S0022109022001338
Publication status	Published - May 2024

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Stock Comovement and Financial Flexibility

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