International evidence on the association of leverage with stock returns and the value premium

We use an international sample to test theories predicting an association between operating and financial leverage with stock returns and the value premium. We find evidence that operating and financial leverage are related to stock returns and the value premium across the sampled countries. Results hold after considering the trade-off between financial and operating leverage and are stronger in North American and European subsamples. Consistent with theory, we find that a country's labor share is positively associated with the value premium. Overall, we present evidence suggesting the value premium reflects compensation for exposure to systematic operating and financing risk.