Abstract
Building on the theoretical asset pricing literature, we examine the size, book-to-market (BTM), and volatility anomalies in the cross-section of unlevered equity returns. Consistent with theory, the unlevered market beta helps explain the cross-section of unlevered equity returns even when we control for the size and BTM factors. The value premium and the volatility puzzle disappear for unlevered returns, but the size discount remains. We revisit the relation between leverage and levered stock returns, which is highly nonlinear. When we account for the resulting heteroskedasticity patterns, we confirm the empirical findings from unlevered returns.
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