| Using the Lehman Fixed Income Database, this paper provides the first comprehensive study of expected firm (not equity) returns. After accounting for the debt component of the firm return, I find that many of the cross sectional determinants of expected equity and debt returns are substantially less powerful in explaining expected firm returns. Cross sectional variation in expected firm returns is small relative to expected equity returns. In general, my results suggest that capital structure effects, not the pricing of the firm's entire asset base, play a major role in understanding many asset pricing regularities observed in the equity markets. The emphasis on capital structure effects challenges various firm level rational and irrational theories motivating the book-to-market, short-term momentum, and long-term reversal effects in equity returns. |
