Discussion of “The Value-Relevance of Changes in Financial Leverage Beyond Growth in Assets and GAAP Earnings”

Dimitrov and Jain examine whether changes in leverage are associated with firm performance after controlling for growth in assets and accounting earnings. They find that firms with increases (decreases) in leverage have negative (positive) current and future stock returns and negative (positive) accounting performance in future periods. By providing new evidence on the relation between debt financing and firm performance, the study extends prior research on the economic implications of firmsʹ financing choices. I examine potential measurement problems associated with the authorsʹ empirical construct for changes in leverage. These problems stem from the use of accounting book values of assets and liabilities in the measurement of leverage and the endogeneity of firmsʹ decisions to change leverage levels. I comment on the unusual characteristics of firms with extreme changes in leverage and their possible effect on the authorsʹ results and inferences. I also discuss issues involved in interpreting the authorsʹ results, particularly the plausibility of alternative explanations suggested by prior research. Lastly, I identify several questions raised by this study that can be examined in future research.