Debt Refinancing and Equity Returns
69 Pages Posted: 31 Oct 2015 Last revised: 2 Feb 2018
Date Written: January 16, 2018
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: Suggested Citation