What is the cross-sectional relationship between financial leverage and expected equity returns? How is the empirical relationship associated with firm's financial decisions? This paper investigates the potential explanations for the flatness relation between financial leverage and expected...

Portfolio sorting is ubiquitous in the empirical finance literature, where it has been widely used to identify pricing anomalies in different asset classes. Despite the popularity of portfolio sorting, little attention has been paid to the statistical properties of the procedure or to the...