Levered Returns

In this paper we investigate the theoretical relation between ﬁnancial leverage and stock returns in a dynamic world where both the corporate investment and ﬁnance decisions are endogenous. We ﬁnd that the link between leverage and stock returns is more complex than the static textbook examples suggest and will usually depend 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 ﬁrmswith relatively more (safe) book assets and fewer (risky) growth opportunities. We show that a quantitative version of our model can successfully replicate the empirical relationships between leverage and returns, even after one controls for variables such as size and book to market.

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Year of publication:	2007-09-01
Authors:	Gomes, Joao F. ; Schmid, Lukas
Institutions:	Institut für Schweizerisches Bankwesen <Zürich>
Subject:	Leverage-Effekt \| Investitionsentscheidung

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Extent:	307200 bytes 44 p. application/pdf
Series:	Universität Zürich - Institut für schweizerisches Bankwesen Working paper ; 437 (2007)
Type of publication:	Book / Working Paper
Language:	English
Classification:	Procurement of capital ; Individual Working Papers, Preprints ; No country specification
Source:	USB Cologne (business full texts)