This paper develops a model of dynamic capital structure choice in the presence of recapitalization costs. The theory provides the optimal dynamic recapitalization policy as a function of firm‐specific characteristics. We find that even small recapitalization costs lead to wide swings in a firm's debt ratio over time. Rather than static leverage measures, we use the observed debt ratio range of a firm as an empirical measure of capital structure relevance. The results of empirical tests relating firms' debt ratio ranges to firm‐specific features strongly support the theoretical model of relevant capital structure choice in a dynamic setting.

Long-term growth expectations are central to investment analysis and corporate valuation. Despite a dominant effect on firm value, the academic literature and practitioner conventions provide little guidance on determining this long-term growth rate. This article takes a step in addressing this gap: we estimate the relationship between long-term growth and an extensive selection of firm, industry, and market characteristics. Market prices do not seem to fully capture long-term growth information. Cross sectional tests yield substantial positive abnormal returns for firms with high expected long-term growth.

This article shows that, for major equity markets, the proportion of index values attributable to the first 5 years of dividends dropped substantially in the first quarter of 2020 and that this drop was not reversed by the end of the year. In the cross section, this breakdown of dividend smoothing due to COVID-19 was less severe for firms with higher operating cash flows and more positively coskewed stock returns, and it was more pronounced for those with higher leverage and in the financial sector. Heavy dividend cutters also experienced a substantial increase in exposure to systematic risk.

Using the COVID-19 pandemic as a laboratory, we show that asset markets assign a time-varying price to firms’ disaster risk exposure. The cross-section of stock returns reflected firms’ different exposure to the pandemic, as measured by their vulnerability to social distancing. As predicted by theory, realized and expected return differentials moved in opposite directions, initially widening and then narrowing. When inferred from market outcomes, firm resilience correlates mainly with exposure to social distancing: vulnerability to social distancing is priced in changes of firms’ expected returns, while measures of financial and environmental resilience are not.

We examine the dynamics of assets under management (AUM) and management fees at the portfolio manager level in the closed-end fund industry. We find that managers capitalize on good past performance and favorable investor perceptions about future performance, as reflected in fund premiums, through AUM expansions and fee increases. However, the penalties for poor performance or unfavorable investor perceptions are either insignificant, or substantially mitigated by manager tenure. Long tenure is generally associated with poor performance and high discounts. Our findings suggest substantial managerial power in capturing CEF rents. We also document significant diseconomies of scale at the manager level.

This paper analyzes the relationship between a firm's capital structure and its information acquisition prior to capital budgeting decisions. It is found that low-growth industries can sustain a large number of levered firms. In these industries, leverage is negatively related to a firm's incentive to acquire information during the capital budgeting process. In contrast, high-growth industries only sustain a small number of levered firms. In these industries, levered firms acquire more information than all-equity financed firms. The model yields empirical predictions regarding the effects of leverage on the expected amount and the volatility of corporate investment.While leverage does not affect firm value, highly levered firms generate a more volatile cash flow than firms with low debt levels.

We show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels.

We show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels.

We explore the link between a firm's stock returns and credit risk using a simple insight from structural models following Merton ( ): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with credit risk premia estimated from CDS spreads. Credit risk premia contain information not captured by physical or risk‐neutral default probabilities alone. This sheds new light on the “distress puzzle”—the lack of a positive relation between equity returns and default probabilities—reported in previous studies.

In a recent article, MacMinn [5] argues that the presence of forward markets eliminates the incentives of the firm's manager to choose production levels that maximize firm value. In this comment, we show that his results do not depend on the presence of forward markets. The critical assumptions are that the manager is endowed with money rather than stock in the firm and that there is no competitive labor market for managers. In addition, his results require time‐inconsistent behavior on the part of the firm's manager.