Market leverage, debt heterogeneity, and equity returns

Author:

Kang Moonsoo1,Baek Seungho2

Affiliation:

1. Brooklyn College City University of New York Brooklyn New York USA

2. Brooklyn College and Graduate Center City University of New York Brooklyn New York USA

Abstract

AbstractWe explore the effect of debt heterogeneity on the cross‐sectional relationship between market leverage and equity returns. Specifically, we discover that firms with high debt heterogeneity exhibit a stronger, positive association between leverage and equity returns. Any alternative economic rationale cannot explain this anomaly. We also find that leverage interacts with debt heterogeneity, making firms with heterogeneous debt structure more financially distressed or constrained. Therefore, this analysis suggests that leverage exerts more pronounced effect on equity returns among firms with heterogeneous debt composition because those firms experience higher financial distress or constraint due to the compounding interaction effect with leverage.

Publisher

Wiley

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