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Debt, Equity and the Equity Price Puzzle

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type , Research 01 Jan 2015Publisher:Elsevier BVJournal:SSRN Electronic Journal (eissn: 1556-5068,

Authors: Finocchiaro, Daria; Mendicino, Caterina;

doi: 10.2139/ssrn.2780395

handle: 10419/157957

Debt, Equity and the Equity Price Puzzle

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Abstract

We show that in a model with equity and debt financing, the specification of the borrowing constraint is crucial to generate empirically plausible responses of macro variables and asset prices to financial shocks. The interaction between financial frictions and labor demand, as in Jermann and Quadrini (2012), is key to the result. A collateral constraint a la Kiyotaki and Moore (1997) augmented with a working capital assumption generates similar results on impact.

Related Organizations

Swedish National Bank
Sweden
European Central Bank
Germany

Keywords

liquidity shocks, ddc:330, stock prices, E44, collateral constraints, E32, co-movement

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