Abstract

https://ssrn.com/abstract=2903515
 


 



Levered Returns and Capital Structure Imbalances


Filippo Ippolito


Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics; Centre for Economic Policy Research (CEPR)

Roberto Steri


University of Lausanne

Claudio Tebaldi


Bocconi University, IGIER and CAREFIN

January 4, 2017


Abstract:     
We revisit the relation between equity returns and financial leverage through the lens of a tradeoff model with adjustment costs of debt. The model provides a “look-alike” Modigliani-Miller equation according to which equity returns increase with relative leverage, which is defined as the difference between observed leverage and target leverage. The model shows that the traditional positive and linear relation between leverage and returns breaks down in the presence of adjustment costs. We provide empirical evidence that relative leverage is a reliable predictor of equity returns, while leverage is not.

Number of Pages in PDF File: 64

Keywords: Leverage, Cross Section of Returns, Target Leverage, Dynamic Capital Structure, Financial Frictions

JEL Classification: G12, G32


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Date posted: January 24, 2017  

Suggested Citation

Ippolito, Filippo and Steri, Roberto and Tebaldi, Claudio, Levered Returns and Capital Structure Imbalances (January 4, 2017). Available at SSRN: https://ssrn.com/abstract=2903515 or http://dx.doi.org/10.2139/ssrn.2903515

Contact Information

Filippo Ippolito (Contact Author)
Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )
Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)
Barcelona Graduate School of Economics ( email )
Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Roberto Steri
University of Lausanne ( email )
Lausanne, Vaud CH-1015
Switzerland
Claudio Tebaldi
Bocconi University, IGIER and CAREFIN ( email )
Via Roentgen 1
Milan, 20136
Italy

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