In a recent paper, George and Hwang (2009) assert that endogenous debt choice in a cross-section of diverse firms can imply a negative relation between leverage or distress risk and expected stock returns. This note clarifies conditions, in the context of their model, under which this is so. We...

Investment-based asset pricing research highlights the role of irreversibility as a determinant of firms' risk and expected return. In a neoclassical model of a firm with costly scale adjustment options, we show that the effect of scale flexibility (i.e., contraction and expansion options) is to...