Required Return on Equity when Capital Structure is Dynamic

Dai, Na and Piccotti, Louis R. (2018). Expected returns and capital structure adjustment, Financial Management, Forthcoming.

54 Pages Posted: 2 Jan 2016 Last revised: 19 Apr 2019

See all articles by Na Dai

Na Dai

SUNY at Albany - School of Business

Louis R. Piccotti

Oklahoma State University - Stillwater - Spears School of Business

Date Written: November 21, 2018

Abstract

We explore the firm’s required return on equity when it has a target debt ratio (TDR). We show that a firm’s expected return is increasing in the product of the distance between its debt ratio (DR) from its TDR (E[TDR-DR]), its speed of adjustment, and the spread of its tax benefits of debt over its bankruptcy costs of debt. Our empirical tests validate that high distance firms’ returns outperform those of low distance firms.

Keywords: Capital structure adjustment, empirical asset pricing, market efficiency

Suggested Citation

Dai, Na and Piccotti, Louis R., Required Return on Equity when Capital Structure is Dynamic (November 21, 2018). Dai, Na and Piccotti, Louis R. (2018). Expected returns and capital structure adjustment, Financial Management, Forthcoming., Available at SSRN: https://ssrn.com/abstract=2710186 or http://dx.doi.org/10.2139/ssrn.2710186

Na Dai

SUNY at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

Louis R. Piccotti (Contact Author)

Oklahoma State University - Stillwater - Spears School of Business ( email )

460 Business
Stillwater, OK 74078-0555
United States

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