Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence

The expected common stock returns are positively related to the ratio of debt (noncommon equity liabil ities) to equity, controlling for the beta and firm size and includin g as well as excluding January, though the relation is much larger in January. This relationship is not sensitive to variations in the mar ket proxy, estimation technique, etc. The evidence suggests that the "premium" associated with the debt/equity ratio is not likely to be just some kind of "risk premium." Copyright 1988 by American Finance Association.

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