Abstract

http://ssrn.com/abstract=1652745
 
 

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Citations (2)



 


 



Endogenous Leverage and Expected Stock Returns


Tatiana Chebonenko


University of Illinois at Urbana-Champaign

Xiangyie Xie Spencer


University of Illinois at Urbana-Champaign

Igor Cunha


Nova School of Business and Economics

Fabricio D'Almeida


University of Illinois at Urbana-Champaign - Department of Finance; University of Illinois at Urbana-Champaign

Timothy C. Johnson


University of Illinois at Urbana-Champaign

November 30, 2010


Abstract:     
In a recent paper, George and Hwang (2009) assert that endogenous debt choice in a cross-section of diverse firms can imply a negative relation between leverage or distress risk and expected stock returns.

This note clarifies conditions, in the context of their model, under which this is so. We correct the contention that variation in bankruptcy costs is sufficient. Variation in firm risk parameters can lead to the desired relation, but may not when also controlling for variation in book-to-market ratios. A simple parameterization of cross-sectional heterogeneity in risk and profitability implies a negative association of expected return with leverage and distress risk and a positive association with book-to-market.

Number of Pages in PDF File: 24

Keywords: expected stock returns, optimal capital structure

JEL Classification: G12

working papers series


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Date posted: August 5, 2010 ; Last revised: December 6, 2010

Suggested Citation

Chebonenko, Tatiana and Spencer, Xiangyie Xie and Cunha, Igor and D'Almeida, Fabricio and Johnson, Timothy C., Endogenous Leverage and Expected Stock Returns (November 30, 2010). Available at SSRN: http://ssrn.com/abstract=1652745 or http://dx.doi.org/10.2139/ssrn.1652745

Contact Information

Tatiana Chebonenko
University of Illinois at Urbana-Champaign ( email )
Urbana, IL 61820
United States
Xiangyie Xie Spencer
University of Illinois at Urbana-Champaign ( email )
601 E John St
Champaign, IL 61820
United States
Igor Cunha
Nova School of Business and Economics ( email )
Faculdade de Economia da UNL (NOVASBE)
Campus de Campolide
Lisbon, 1099-032
Portugal
+351 213801693 (Phone)
Fabricio D'Almeida
University of Illinois at Urbana-Champaign - Department of Finance ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
University of Illinois at Urbana-Champaign ( email )
601 E John St
Champaign, IL 61820
United States
Timothy C. Johnson (Contact Author)
University of Illinois at Urbana-Champaign ( email )
601 E John St
Champaign, IL 61820
United States
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