12
Michael J. Mauboussin and Dan Callahan, “Operating Leverage: A Framework for Anticipating Changes in
Earnings,” Credit Suisse Global Financial Strategies, June 14, 2016.
13
Malcolm Baker, Mathias F. Hoeyer, and Jeffrey Wurgler, “Leverage and the Beta Anomaly,” Journal of
Financial and Quantitative Analysis, Vol. 55, No. 5, August 2020, 1491-1514.
14
Franco Modigliani and Merton H. Miller, “The Cost of Capital, Corporation Finance and the Theory of
Investment,” American Economic Review, Vol. 48, No. 3, June 1958, 261-297.
15
Merton H. Miller, “The Modigliani-Miller Propositions After Thirty Years,” Journal of Economic Perspectives,
Vol. 2, No. 4, Autumn 1998, 99-120; John R. Graham, “How Big Are the Tax Benefits of Debt?” Journal of
Finance, Vol. 55, No. 5, October 2000, 1901-1941; and Jules H. Van Binsbergen, John R. Graham, and Jie
Yang, “The Cost of Debt,” Journal of Finance, Vol. 65, No. 6, December 2010, 2089-2136.
16
Graham, “How Big Are the Tax Benefits of Debt?”; van Binsbergen, Graham, and Yang, “The Cost of Debt,”
and Deen Kemsley and Doron Nissim, “Valuation of the Debt Tax Shield,” Journal of Finance, Vol. 57, No. 5,
October 2002, 2045-2073. Also, Jennifer Blouin, John E. Core, and Wayne Guay, “Have The Benefits of Debt
Been Overestimated?” Journal of Financial Economics, Vol. 98, No. 2, November 2010, 195-213.
17
Ian A. Cooper and Sergei A. Davydenko, “Estimating the Cost of Risky Debt,” Journal of Applied Corporate
Finance, Vol. 19, No. 3, Summer 2007, 90-95.
18
“Default, Transition, and Recovery: 2021 Annual Global Corporate Default And Rating Transition Study,” S&P
Global Ratings, April 13, 2022.
19
Robert C. Merton, “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,” Journal of Finance,
Vol. 29, No. 2, May 1974, 449-470.
20
“Leases (Topic 842),” Financial Accounting Standards Board Update No. 2016-02, February 2016.
21
Yun Li, “A Big Change in Accounting Will Put $3 Trillion in Liabilities on Corporate Balance Sheets,” CNBC,
February 16, 2019.
22
The seminal paper on CAPM is William F. Sharpe, “Capital Asset Prices: A Theory of Market Equilibrium
Under Conditions of Risk,” Journal of Finance, Vol. 19, No. 3, September 1964, 425-442. For a good overview
of the CAPM, see André F. Perold, “The Capital Asset Pricing Model,” Journal of Economic Perspectives, Vol.
18, No. 3, Summer 2004, 3-24. The three-factor model was first described in Eugene F. Fama and Kenneth R.
French, “The Cross-Section of Expected Stock Returns,” Journal of Finance, Vol. 47, No. 2, June 1992, 427-
465.
23
Kewei Hou, Chen Xue, and Lu Zhang, “Replicating Anomalies,” Review of Financial Studies, Vol. 33, No. 5,
May 2020, 2019-2133. In reality, investing using factors requires a lot of judgment as factors can be episodic
and there are frictions in execution. AQR Capital Management, an investment firm, has done excellent research
on this topic. See www.aqr.com/Insights/Research.
24
Rolf W. Banz, “The Relationship Between Return and Market Value of Common Stocks,” Journal of Financial
Economics, Vol. 9, No. 1, March 1981, 3-18 and Eugene F. Fama and Kenneth R. French, “The Cross-Section
of Expected Stock Returns,” Journal of Finance, Vol. 47, No. 2, June 1992, 427-465.
25
Eugene F. Fama and Kenneth R. French, “A Five-Factor Asset Pricing Model,” Journal of Financial
Economics, Vol. 116, No. 1, April 2015, 1-22.
26
Mark M. Carhart, “On Persistence in Mutual Fund Performance,” Journal of Finance, Vol. 52, No. 1, March
1997, 57-82.
27
Robert Novy-Marx, “The Other Side of Value: The Gross Profitability Premium,” Journal of Financial
Economics, Vol. 108, No. 1, April 2013, 1-28.
28
Michael J. Cooper, Huseyin Gulen, and Michael J. Schill, “Asset Growth and the Cross-Section of Stock
Returns,” Journal of Finance, Vol. 63, No. 4, August 2008, 1609-1651; Akiko Watanabe, Yan Xu, Tong Yao, and
Tong Yu, “The Asset Growth Effect: Insights for International Equity Markets,” Journal of Financial Economics,
Vol. 108, No. 2, May 2013, 259-263; and Sheridan Titman, K. C. John Wei, and Feixue Xie, “Market Development
and the Asset Growth Effect: International Evidence,” Journal of Financial and Quantitative Analysis, Vol. 48,
No. 5, October 2013, 1405-1432. It turns out that asset growth is a blunt tool that may fail to capture the perceived
underlying driver of overinvestment. For example, see Michael Cooper, Huseyin Gulen, and Mihai Ion, “The Use
of Asset Growth in Empirical Asset Pricing,” Working Paper, August 2022. An explanation that may better fit the
facts is that companies that have asset growth as the result of equity issuance deliver poor subsequent