The authors provide a reasonably user‐friendly and intuitive model for arriving at a company's optimal, or value‐maximizing, leverage ratio that is based on the estimation of company‐specific cost and benefit functions for debt financing. The benefit functions are downward‐sloping,...

We decompose firm-level corporate bond and equity index returns into (1) duration-matched government bond returns and (2) the excess return over and above this duration-matched counterfactual, what we term duration-adjusted returns. Our decomposition provides markedly different return patterns...