Leverage, Volatile Future Earnings Growth and Expected Stock Returns

dc.contributor.authorAlcock, Jamie
dc.contributor.authorSteiner, Eva
dc.contributor.authorTan, Kelvin Jui Keng
dc.date.accessioned2020-09-11T13:49:22Z
dc.date.available2020-09-11T13:49:22Z
dc.date.issued2014-08-07
dc.description.abstractWe provide theory and evidence to complement Choi's [RFS, 2013] important new insights on the returns to equity in `value' firms. We show that higher future earnings growth ameliorates the value-reducing effect of leverage and, because the market for earnings is incomplete, reduces the earnings-risk sensitivity of the default option. Ceteris paribus, a levered firm with low (high) earnings growth is more sensitive to the first (second) of these effects thus generating higher (lower) expected returns. We demonstrate this by modeling equity as an Asian-style call option on net earnings and find significant empirical support for our hypotheses.
dc.description.legacydownloadsSteiner9_Leverage.pdf: 220 downloads, before Aug. 1, 2020.
dc.identifier.other9268858
dc.identifier.urihttps://hdl.handle.net/1813/71352
dc.language.isoen_US
dc.rightsRequired Publisher Statement: Copyright held by the authors.
dc.subjectcorporate leverage
dc.subjectdefault risk
dc.subjectearnings risk
dc.subjectearnings growth
dc.subjectvalue vs growth
dc.subjectstochastic earnings valuation model
dc.titleLeverage, Volatile Future Earnings Growth and Expected Stock Returns
dc.typepreprint
local.authorAffiliationAlcock, Jamie: University of Sydney
local.authorAffiliationSteiner, Eva: ems457@cornell.edu Cornell University School of Hotel Administration
local.authorAffiliationTan, Kelvin Jui Keng: University of Queensland
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