Off-Balance-Sheet Assets, Financial Leverage, and Stock Returns

47 Pages Posted: 5 Jan 2018 Last revised: 3 May 2023

See all articles by Jasmine Zhang

Jasmine Zhang

University of California, Berkeley

Xiao-Jun Zhang

University of California, Berkeley; China Academy of Financial Research (CAFR)

Date Written: April 1, 2023

Abstract

This paper examines the cross-sectional relation between leverage and future stock returns. Research documents a puzzling non-positive correlation. We show it is largely caused by firms’ reliance on internal financing when they have significant investments in off-balance-sheet assets. Firms with a high cost of equity financing thus can have low leverage, creating a negative correlation between leverage and future stock returns. This phenomenon is more pronounced among firms with low leverage, resulting in an overall check-mark-shaped relationship between leverage and future stock returns.

Keywords: Leverage, Off-Balance-Sheet Assets, Investments, Conservative Accounting, Financial Assets, Stock Returns.

JEL Classification: M41, G12, G32, H26

Suggested Citation

Zhang, Jasmine and Zhang, Xiao-Jun, Off-Balance-Sheet Assets, Financial Leverage, and Stock Returns (April 1, 2023). Available at SSRN: https://ssrn.com/abstract=3095078 or http://dx.doi.org/10.2139/ssrn.3095078

Jasmine Zhang

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Xiao-Jun Zhang (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
222
Abstract Views
1,680
Rank
250,507
PlumX Metrics