November 6, 2022

Bruce Grundy (ANU)Yue Wang (ANU) and I recently completed a new paper titled More Debt More Leverage? In the paper we investigate whether the primary purpose of raising debt levels was to finance growth opportunities. If so, then higher debt levels would signal greater post-payout returns on assets but contain no information about firm risk. Using annual data for more than 5,500 public US non-financial firms from 1971 to 2021, we reject this hypothesis by showing that the return channel accounts for only 30% of the variation in debt levels, with the risk channel accounting for much of the remainder. We show that the link between greater debt growth and higher firm risk is particularly pronounced during accommodative monetary policy regimes. The paper was previously titled "What Changes in Corporate Debt Levels Reveal about Firms' Risk, Returns and Payouts"