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Levered Returns and Capital Structure Imbalances

Author

Listed:
  • Filippo Ippolito

    (Universitat Pompeu Fabra, Barcelona Graduate School of Economics, and Centre for Economic Policy Research (CEPR))

  • Roberto Steri

    (University of Lausanne and Swiss Finance Institute)

  • Claudio Tebaldi

    (Bocconi University)

Abstract

We revisit the relation between equity returns and financial leverage through the lens of a trade-off model with costly capital structure rebalancing. The model provides a “lookalike” Modigliani-Miller equation that predicts that expected equity returns depend on whether a firm’s leverage is above or below its target leverage. The data support the model predictions. Controlling for leverage, overlevered (underlevered) firms earn higher (lower) returns. Controlling for target leverage the textbook positive relationship between leverage and returns is restored, while target leverage is negatively related to returns.

Suggested Citation

  • Filippo Ippolito & Roberto Steri & Claudio Tebaldi, 2018. "Levered Returns and Capital Structure Imbalances," Swiss Finance Institute Research Paper Series 18-36, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1836
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2903515
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    Cited by:

    1. Chaderina, Maria & Weiss, Patrick & Zechner, Josef, 2022. "The maturity premium," Journal of Financial Economics, Elsevier, vol. 144(2), pages 670-694.

    More about this item

    Keywords

    Leverage; Cross Section of Returns; Target Leverage; Dynamic Capital Structure; Financial Frictions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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