This paper examines the cross-sectional relation between leverage and future stock returns. Prior research documents a puzzling negative correlation. We show that it is largely caused by firms' use of internal financing when having significant off-balance-sheet operating assets due to...

Many accounting numbers appear in standard factor models, including book value, investment, return on equity (ROE), and other profitability measures. However, they do so without a clear explanation of why they indicate investment risk. The papers shows that these numbers are generated under...