A new approach to asset pricing models: the term structure of leverage and refinancing risk

This paper contributes novel insights into leverage-related risk factors in stock returns and highlights the significance of debt maturities and refinancing in understanding leverage effects within asset pricing. This research is pioneering in the literature as it examines the extent to which portfolio returns associated with the maturity structure of leverage are influenced by risk factors, utilizing an internationally diversified portfolio. The findings from the factor models indicate that higher total leverage in financing is associated with lower expected stock returns. Further, this paper analyzes the explanatory power of factor models on 18 720 equal-and value-weighted portfolio returns based on leverage and refinancing intensity. The Fama–French six-factor model applied to the equal-weighted leverage-based portfolio (RLEV) exhibits the lowest asset pricing error, outperforming alternative models. Based on portfolio performance evaluation measures, firms with small market capitalization and high leverage usage exhibit superior risk-adjusted returns relative to the market portfolio, thereby reinforcing the robustness of the model’s findings.