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Abstract

Vol. 58, No. 3, pp. 217-230 (2007)

“Capital Structure and Expected Rate of Return of Equity”
Toshiki Honda (Graduate School of International Corporate Strategy, Hitotsubashi University), Junko Yatsunami (Graduate Student of International Corporate Strategy, Hitotsubashi University)

Capital structures of firms are closely related to the expected return of their equities. We study the optimal capital structure model and show that Berk's size effect may not be observed for leveraged firms. It follows that the often-used Fama-French factors relation between the capital structure and the expected return of equity. Some of these theoretical predictions are confirmed using Japanese stock market data.