Leverage and the Beta Anomaly

40 Pages Posted: 31 Aug 2016 Last revised: 14 Jan 2019

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Mathias Hoeyer

University of Oxford

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 14, 2019

Abstract

The well-known weak empirical relationship between beta risk and the cost of equity--the
beta anomaly--generates a simple tradeoff theory: As firms lever up, the overall cost of
capital falls as leverage increases equity beta, but as debt becomes riskier the marginal
benefit of increasing equity beta declines. As a simple theoretical framework predicts, we
find that leverage is inversely related to asset beta, including upside asset beta, which is
hard to explain by the traditional leverage tradeoff with financial distress that emphasizes
downside risk. The results are robust to a variety of specification choices and control
variables.

Keywords: risk anomaly, capital structure, leverage

Suggested Citation

Baker, Malcolm P. and Hoeyer, Mathias and Wurgler, Jeffrey A., Leverage and the Beta Anomaly (January 14, 2019). NYU Working Paper No. 2451/34914, Available at SSRN: https://ssrn.com/abstract=2832704

Malcolm P. Baker (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
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617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

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Mathias Hoeyer

University of Oxford

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Oxford, OX1 4AU
United Kingdom

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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