The purpose of this study is to examine factors that determine firms’ leverage level and to test whether leverage change has significant effect on stock return. Using non-financial firms listed on the Stock Exchange of Thailand from the year 1999 to 2008, we find that firm size, asset tangibility and industry median of leverage level are positively related to leverage whereas growth opportunity, profitability, and expected inflation are negatively related to leverage. The results confirm that both firms’ specific factors and external factors have the significant impacts on the decision for leverage level. Moreover, the results show that quarterly change in a firm’s leverage ratio has the significant and negative effect on the stock return. These results are robust after controlling for a number of firm characteristics such as ROE, book-to-market, market capitalization, and the past leverage ratio.