This paper investigates the effect of operating leverage, and the subsequent abandonment option available to managers, on the relationship between corporate earnings and optimal financial leverage, thereby providing an alternative (rational) explanation for the observed negative relationship...

We analyse the effect of mean-reverting cash flows on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. In a partial equilibrium setting we find that such agency costs are significantly lower under mean-reverting (MR) dynamics, when compared to the...