Leverage- and Cash-Based Tests of Risk and Reward with Improved Identification

59 Pages Posted: 8 Jun 2017 Last revised: 18 Mar 2018

See all articles by Ivo Welch

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: March 14, 2018

Abstract

Leverage offers not only its own directional implications for both risk and reward, but also facilitates superior tests of risk-reward theories: Leverage can change with and without corporate intervention, sometimes even discontinuously. In better-identified contexts, it is more difficult to blame omitted factors, contamination, information, or corporate responses. The evidence suggests that changes in leverage increase volatility but decrease average returns. These effects appear in the large panel of U.S. stock returns, survive progressively better empirical identification, and even hold in equity issuing and dividend payment quasi-experiments.

Keywords: Leverage, Risk, Reward, Quasi Experiments, Behavioral Finance

JEL Classification: G12, G31, G32, G35

Suggested Citation

Welch, Ivo, Leverage- and Cash-Based Tests of Risk and Reward with Improved Identification (March 14, 2018). Available at SSRN: https://ssrn.com/abstract=2981827 or http://dx.doi.org/10.2139/ssrn.2981827

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

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HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

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