Financial constraints and stock returns: This paper examines whether financial constraints affect firm value and are reflected in stock returns. Using several measures of financial constraints, the authors find that financially constrained firms have stock returns that move together over time. This financial constraint factor in stock returns is related to, but not well explained by, other empirically identified factors in asset returns. Constrained firms have remarkably low returns in our sample period of 1968-1995, both unconditionally and in the context of empirical asset pricing models. Financial constraint returns help explain returns following initial public offerings and dividend omissions. The paper finds limited support for the hypothesis that the relative performance of financially constrained firms reflects monetary policy, credit conditions, and business cycles. The authors construct a financial constraint factor by forming portfolios of firms based on observable characteristics related to financial constraints. They find that the financial constraint factor is highly correlated with the four individual return series. The financial constraint factor is also correlated with the size and market factors, but not with the momentum factor. The financial constraint factor has a negative mean and is mispriced by both the CAPM and multifactor models. The authors find that the financial constraint factor partially explains two corporate finance anomalies: IPOs and dividend omissions. The financial constraint factor is also related to macroeconomic variables, with high FC firms having higher correlations with macroeconomic variables than low FC firms. The authors find that the financial constraint factor is more sensitive to macroeconomic variables than other factors. The paper concludes that financial constraints are an important determinant of firm value and that the financial constraint factor is an important factor in asset pricing.Financial constraints and stock returns: This paper examines whether financial constraints affect firm value and are reflected in stock returns. Using several measures of financial constraints, the authors find that financially constrained firms have stock returns that move together over time. This financial constraint factor in stock returns is related to, but not well explained by, other empirically identified factors in asset returns. Constrained firms have remarkably low returns in our sample period of 1968-1995, both unconditionally and in the context of empirical asset pricing models. Financial constraint returns help explain returns following initial public offerings and dividend omissions. The paper finds limited support for the hypothesis that the relative performance of financially constrained firms reflects monetary policy, credit conditions, and business cycles. The authors construct a financial constraint factor by forming portfolios of firms based on observable characteristics related to financial constraints. They find that the financial constraint factor is highly correlated with the four individual return series. The financial constraint factor is also correlated with the size and market factors, but not with the momentum factor. The financial constraint factor has a negative mean and is mispriced by both the CAPM and multifactor models. The authors find that the financial constraint factor partially explains two corporate finance anomalies: IPOs and dividend omissions. The financial constraint factor is also related to macroeconomic variables, with high FC firms having higher correlations with macroeconomic variables than low FC firms. The authors find that the financial constraint factor is more sensitive to macroeconomic variables than other factors. The paper concludes that financial constraints are an important determinant of firm value and that the financial constraint factor is an important factor in asset pricing.