Financial leverage and stock return comovement

Leverage-initiating stocks experience an increase in return comovement with leveraged and a decrease zero-leverage the year after leverage initiation event. Conversely, that fully deleverage comove more their new peers of less old stocks. These findings are robust controlling for common factors firm characteristics using various time series events as exogenous shocks to corporate decisions. Our can be explained by investor clienteles financial not driven omitted variables other characteristic-induced comovements. • We investigate style investing. Leverage initiators (less) (zero-leverage) Deleveraged (leveraged) Shifts greater larger absolute changes. Mutual funds adjust holdings changing around event year.