I test the hypothesis that short debt maturity attenuates the negative effect of growth opportunities on leverage. Using simultaneous equations with leverage and maturity endogenous, I find strong support for an economically significant attenuation effect. The negative effect of growth opportunities on leverage for firms with all shorter-term debt is less than one-sixth as large as the effect for firms with all longer-term debt. Short maturity also increases liquidity risk, however, which negatively affects leverage. The results suggest that firms trade off the cost of underinvestment problems against the cost of liquidity risk when choosing short maturity.

I test the hypothesis that short debt maturity attenuates the negative effect of growth opportunities on leverage. Using simultaneous equations with leverage and maturity endogenous, I find strong support for an economically significant attenuation effect. The negative effect of growth opportunities on leverage for firms with all shorter-term debt is less than one-sixth as large as the effect for firms with all longer-term debt. Short maturity also increases liquidity risk, however, which negatively affects leverage. The results suggest that firms trade off the cost of underinvestment problems against the cost of liquidity risk when choosing short maturity.

[We reexamine long-term abnormal returns for portfolios sorted on governance characteristics. Firms with strong shareholder rights and firms with weak shareholder rights differ from the population of firms and from each other in how they cluster across industries. Using well-specified tests under this industry clustering, we find statistically zero long-term abnormal returns for portfolios sorted on governance. Our results have important implications for interpreting studies that link governance to firm value and stock returns, demonstrate the importance of the coarseness of industry definitions in financial research, and shed light on addressing statistical problems created by industry clustering in samples.]

We reexamine long-term abnormal returns for portfolios sorted on governance characteristics. Firms with strong shareholder rights and firms with weak shareholder rights differ from the population of firms and from each other in how they cluster across industries. Using well-specified tests under this industry clustering, we find statistically zero long-term abnormal returns for portfolios sorted on governance. Our results have important implications for interpreting studies that link governance to firm value and stock returns, demonstrate the importance of the coarseness of industry definitions in financial research, and shed light on addressing statistical problems created by industry clustering in samples.