Financial constraints and stock returns

We test whether the impact of financial constraints on firm value is observ able in stock returns. We form portfolios of firms based on observable char acteristics related to financial constraints and test for common variation in stock returns. Financially constrained firms' stock returns move togethe r over time, suggesting that constrained firms are subject to common shocks . Constrained firms have low average stock returns in our 1968-1997 sample of growing manufacturing firms. We find no evidence that the relative perfo rmance of constrained firms reflects monetary policy, credit conditions, or business cycles.