We develop a dynamic trade-off model with mean-reversion in earnings and a growth option and provide predictions on the impact of long-term profitability, mean reversion speed, volatility of earnings and debt priority structure on firm value, the dynamics of leverage and credit spreads and the optimal timing of growth option investment and default. Our model shows that the relation between current profitability and leverage follows a U-shape driven by growth options. Our framework allows for a direct comparison with related settings focusing on non-stationary earnings dynamics and thus provides insights on the impact of earnings dynamics on dynamic capital structure decisions