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Would You Follow MM or a Profitable Trading Strategy?Yaz Gulnur MuradogluQueen Mary University of London; City University London - Sir John Cass Business School Brian Baturevichaffiliation not provided to SSRN October 1, 2010 Frontiers in Finance and Economics, Vol. 7, No. 2, 69-89, October 2010 Abstract: We investigate the ability of company capital structures to be used as a predictor for abnormal returns. We carry out robustness tests to determine the predictive ability of debt ratios, controlling for size of company, price-to-earnings (PE) ratio, market-to-book value ratio (MTBV) and beta. We show that companies in the lowest leverage decile, exhibit the highest abnormal returns – 17% over a three-year period. A strategy of choosing the smallest companies with the lowest leverage yields cumulative abnormal returns (CARs) in excess of 80% over three years.
Number of Pages in PDF File: 21 Keywords: Capital Structure, leverage, abnormal returns, trading strategy JEL Classification: G11, G12, G17 Accepted Paper SeriesDate posted: December 17, 2010Suggested CitationContact Information
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