Does Debt Explain the Investment Premium?

71 Pages Posted: 9 Dec 2018

Date Written: November 19, 2018


The investment premium -- the finding that firms with low asset growth deliver high average returns -- is an integral part of recent factor models. I document empirically that the investment premium (1) reflects leverage, (2) does not exist among zero-leverage firms, and (3) increases with firms' refinancing intensities. This new evidence challenges prominent explanations of the investment premium including the q-theory of investment and behavioral finance. To explain the evidence, I develop a model in which firms make both optimal investment and financing decisions. The model shows that the investment premium reflects both leverage and refinancing intensities consistent with my empirical findings.

Keywords: Equity returns, investments, leverage, debt maturity, debt overhang

JEL Classification: G12, G13, G31, G32, G33

Suggested Citation

Poulsen, Thomas K., Does Debt Explain the Investment Premium? (November 19, 2018). Available at SSRN: or

Thomas K. Poulsen (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442

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