Debt Refinancing and Equity Returns

Abstract

This paper presents empirical evidence that the maturity structure of financial leverage affects the cross-section of equity returns. We find that short-term leverage is associated with a positive premium, whereas long-term leverage is not. The premium for short-term compared to long-term leverage reflects higher exposure of equity to systematic risk. To rationalize our findings, we show that the same patterns emerge in a model of debt rollover risk with endogenous leverage and debt maturity choice. Our results suggest that analyses of leverage effects in asset prices and corporate financial applications should account for the maturity structure of debt.FINANCIAL LEVERAGE PLAYS A CENTRAL role in corporate finance and asset pricing. In this paper, we empirically revisit the cross-sectional relation between market leverage and equity returns from a novel perspective. Specifically, we investigate the possibility that shareholders care about firms' debt maturity structures and therefore price leverage associated with short-term

Levered Returns and Capital Structure Imbalances

“…This paper mainly relates to the literature that examines how financing frictions introduce deviations from the Modigliani-Miller theorem and ultimately determine cross-sectional spreads in expected equity returns. Recent papers along these lines include Livdan, Sapriza, and Zhang (2009), Gomes and Schmid (2010), Caskey, Hughes, and Liu (2012), Ozdagli (2012), Obreja (2013), Ozdagli (2015), Doshi, Jacobs, Kumar, andRabinovitch (2019), andFriewald, Nagler, andWagner (2021). Our model and the associated empirical findings provide a number of new contributions.…”

Capital structure and momentum strategies

“…As capital structure is an important topic in corporate finance, its impact on future stock returns has been extensively studied in the literature. A partial list of these studies includes Bhandari (1988), Hovakimian et al (2001), Baker and Wurgler (2002), Welch (2004), Muradoglu and Baturevich (2010), Yang et al (2010), Ozdagli (2012), Chong and Kim (2019) and Friewald et al (2022). While these studies examine the impact of capital structure on stock returns, they do not address the research question in this paper.…”