Levered Returns

Published

Journal Article

This paper revisits the theoretical relation between financial leverage and stock returns in a dynamic world where both corporate investment and financing decisions are endogenous. We find that the link between leverage and stock returns is more complex than static textbook examples suggest, and depends on the investment opportunities available to the firm. In the presence of financial market imperfections, leverage and investment are generally correlated so that highly levered firms are also mature firms with relatively more (safe) book assets and fewer (risky) growth opportunities. A quantitative version of our model matches several stylized facts about leverage and returns. © 2010 the American Finance Association.

Full Text

Duke Authors

Cited Authors

  • Gomes, JF; Schmid, L

Published Date

  • April 1, 2010

Published In

Volume / Issue

  • 65 / 2

Start / End Page

  • 467 - 494

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.2009.01541.x

Citation Source

  • Scopus