We revisit the relation between equity returns and financial leverage through the lens of a dynamic trade-off model …'s leverage is above or below its target leverage. We provide empirical evidence in support of the model predictions. Controlling … for leverage, overlevered (underlevered) firms earn higher (lower) returns. A quantitative version of our model reproduces …

We revisit the relation between equity returns and financial leverage through the lens of a dynamic trade-off model …'s leverage is above or below its target leverage. We provide empirical evidence in support of the model predictions. Controlling … for leverage, overlevered (underlevered) firms earn higher (lower) returns. A quantitative version of our model reproduces …

model: Starting at zero leverage, the overall cost of capital initially falls as leverage increases equity risk. As debt … becomes risky, however, the marginal benefit of increasing equity risk declines. The optimum is reached at lower leverage for … firms with high asset risk. Consistent with a risk anomaly tradeoff, firms with low-risk assets choose higher leverage. In …

estimation. Although neither leverage ratios nor leverage targets are moving fast|making it a race between a tortoise and a snail … towards target leverage, through the lens of a standard dynamic capital structure model. In the model, firms adjust leverage … opportunities. Capital market imperfections make leverage more stable than target leverage, generating slow adjustments despite …

reversals in response to news, the strength of which depend upon the firm's leverage. Finally, the firm's capital structure can …

amplifies the impact of aggregate shocks on the term structure of credit spreads, especially for firms with high leverage or …