Variance of deviation from optimal leverage

Authors

• Mustafa O. Caglayan, Florida International University College of Business
• Diogo Duarte, Florida International University College of Business
• Xiaomeng Lu, Georgia College & State University

Document Type

Article

Publication Date

9-1-2025

Publication Title

Journal of Financial Research

Abstract

We show that deviations from the firm's target leverage are priced in the cross-section of stock returns and that the relation between these quantities is nonlinear. The concave nonlinear relation between deviation from the target leverage and next-period return is strong during economic expansions and vanishes during recessions. Our portfolio analysis provides support for the concave relation between deviation from the target leverage and next-period returns as well. We develop a factor named variance of deviation from optimal leverage (VDOL) and show that it is an important risk factor that has been omitted in the literature.

Volume Number

48

Issue Number

3

First Page

1408

Last Page

1442

DOI

10.1111/jfir.12438

Recommended Citation

Caglayan, Mustafa O.; Duarte, Diogo; and Lu, Xiaomeng, "Variance of deviation from optimal leverage" (2025). Faculty and Staff Works. 882.
https://kb.gcsu.edu/fac-staff/882