We explore the link between a firm's stock returns and its credit risk using a simple insight from structural models following Merton (1974): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with...

We derive a formula for the expected return on a stock in terms of the risk-neutral variance of the market and the stock's excess risk-neutral variance relative to the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The...

We show that the mixed evidence on how financial leverage affects stock returns can be reconciled by accounting for firms' debt maturity structures. In our model, firms jointly optimize leverage and debt maturity by balancing benefits and rollover risk of short-term relative to long-term debt....