%0 Journal Article
%T Leverage, Default Risk, and the Cross-Section of Equity and Firm Returns
%A Frederick M. Hood III
%J Modern Economy
%P 1610-1639
%@ 2152-7261
%D 2016
%I Scientific Research Publishing
%R 10.4236/me.2016.714143
%X I examine the two components of default risk and how
they relate to stock returns, size, and book-to-market. High default risk firms
do not necessarily have high levels of systematic asset risk. I show that the
two components of default risk, asset volatility and leverage, are negatively
related. I provide evidence that leverage differences across firms are not
reflected in equity betas. Therefore, I construct firm returns using estimates
of firm¡¯s debt returns. The results indicate that a large part of the value
premium and some of the size premium can be explained by differences in
leverage across firms.
%K Default Risk
%K Distress Risk
%K Beta Estimation
%K Value Premium
%U http://www.scirp.org/journal/PaperInformation.aspx?PaperID=72736