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• Article | Journal of Financial and Quantitative Analysis | August 2020

  Leverage and the Beta Anomaly

  Malcolm Baker, Mathias F. Hoeyer and Jeffrey Wurgler

  The well-known weak empirical relationship between beta risk and the cost of equity—the beta anomaly—generates a simple tradeoff theory: As firms lever up, the overall cost of capital falls as leverage increases equity beta, but as debt becomes riskier the marginal benefit of increasing equity beta declines. As a simple theoretical framework predicts, we find that leverage is inversely related to asset beta, including upside asset beta, which is hard to explain by the traditional leverage tradeoff with financial distress that emphasizes downside risk. The results are robust to a variety of specification choices and control variables.

  Keywords: risk anomaly; leverage; Capital Structure; Risk and Uncertainty;

  Citation:

  Baker, Malcolm, Mathias F. Hoeyer, and Jeffrey Wurgler. "Leverage and the Beta Anomaly." Journal of Financial and Quantitative Analysis 55, no. 5 (August 2020): 1491–1514.  View Details

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• Case | HBS Case Collection | January 2015 (Revised October 2018)

  Dogs of the Dow

  Malcolm Baker, Samuel G. Hanson and James Weber

  This case describes the Dogs of the Dow investment strategy, value investing, and using dividend yields as a means to determine intrinsic value. It also describes exchange traded notes and a particular exchange traded note, known as the Dogs of the Dow, which tracks the performance of the 10 highest yielding stocks of the 30 stocks that make up the Dow Jones Industrial Average (DJIA). The case provides share price data, dividend data, and financial statement data on the 30 DJIA companies to enable students to perform their own calculations.

  Keywords: Dow Jones; Dow Jones Industrial Average; Exchange Traded Note; Exchange Traded Fund; value investing; Benjamin Graham; investment strategy; dividend yield; intrinsic value; dividend discount model; Michael O'Higgins; Financial Instruments; Investment; Strategy; Financial Services Industry; United States;

  Citation:

  Baker, Malcolm, Samuel G. Hanson, and James Weber. "Dogs of the Dow." Harvard Business School Case 215-020, January 2015. (Revised October 2018.)  View Details

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• Working Paper | 2018

  Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds

  Malcolm Baker, Daniel Bergstresser, George Serafeim and Jeffrey Wurgler

  We study green bonds, which are bonds whose proceeds are used for environmentally sensitive purposes. After an overview of the U.S. corporate and municipal green bonds markets, we study pricing and ownership patterns using a simple framework that incorporates assets with nonpecuniary utility. As predicted, we find that green municipal bonds are issued at a premium to otherwise similar ordinary bonds. We also confirm that green bonds, particularly small or essentially riskless ones, are more closely held than ordinary bonds. These pricing and ownership effects are strongest for bonds that are externally certified as green.

  Keywords: green bonds; pricing; climate change; Bonds; Environmental Sustainability; Financial Markets; Price; Ownership;

  Citation:

  Baker, Malcolm, Daniel Bergstresser, George Serafeim, and Jeffrey Wurgler. "Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds." NBER Working Paper Series, No. 25194, October 2018.  View Details

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