Abstract
This paper investigates the potential effect of finance constraints on asset pricing, focusing on cross-sectional patterns of mean reversion. Theoretical work by Brock and LeBaron (1990) shows that in a production-economy version of the Lucas asset pricing model, finance constraints can accentuate mean reversion. Using panel data and distinctive Canadian institutional features which allow us to identify finance-constrained firms, we find that constrained firms show more evidence of mean reversion. Using a bootstrapping approach to inference, we show that the differences between constrained and unconstrained firms are statistically significant.
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