Debt Refinancing and Equity Returns

69 Pages Posted: 31 Oct 2015 Last revised: 2 Feb 2018

See all articles by Nils Friewald

Nils Friewald

Norwegian School of Economics (NHH); Centre for Economic Policy Research (CEPR)

Florian Nagler

Bocconi University; IGIER - Innocenzo Gasparini Institute for Economic Research

Christian Wagner

WU Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Date Written: January 16, 2018

Abstract

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. Shareholders require returns that increase with, both, leverage and debt refinancing intensity. Book-to-market and size are related to leverage and refinancing intensity but refinancing intensities convey generic return-relevant information. Empirically, stock returns increase with leverage and refinancing intensity. The information in debt refinancing intensities is not subsumed by book-to-market, size, or other firm characteristics.

Keywords: equity returns, optimal capital structure, leverage, debt refinancing, rollover risk, book-to-market, size

JEL Classification: G12, G32, G33

Suggested Citation

Friewald, Nils and Nagler, Florian and Wagner, Christian, Debt Refinancing and Equity Returns (January 16, 2018). Available at SSRN: https://ssrn.com/abstract=2684462 or http://dx.doi.org/10.2139/ssrn.2684462

Nils Friewald

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Florian Nagler

Bocconi University ( email )

Via Roentgen 1
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/site/floriannagler/

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Milan, MI 20136
Italy

Christian Wagner (Contact Author)

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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