By explicitly considering the dynamic nature of capital structure，this paper re-examines the rela-tionship between leverage and cross-section expected returns in both China and the U． S． ． Specifically，the paper decomposes leverage into target and relative components and finds that relative leverage better explains expected returns than observed leverage． Fama-MacBeth regression results show that relative leverage is posi-tively and significantly related to equity returns in both these two markets，however，the effect mechanism of relative leverage differs． Specifically，compared with the U． S． ，over-leverage tends to affect equity returns more significantly than under-leverage and relative book leverage has a weaker influence in China． Further-more，the portofolio tests using joint iterated GMM procedure show that different asset pricing models with rela-tive leverage factors dominate FF model in China and the U． S． respectively． These findings provide a new perspective to the relationship between financial leverage and equity returns under different institutional envi-ronments．