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Predictability of UK Stock Returns by Using Debt Ratios

Yaz Gulnur Muradoglu
City University London - Sir John Cass Business School

Mark Whittington
Warwick Business School

October 2001

CUBS Finance Working Paper No. 05
Cass Business School Research Paper

Abstract:
The purpose of this study is to examine the ability of debt ratios in predicting company performance and stock returns in the long run. The U.K. companies included in the FTSE-350 index for the past ten years constitute our sample. We rank the companies according to the degree of leverage that they have. Then we examine the predictive ability of the debt burden for shareholder wealth by investigating the cumulative abnormal returns and buy and hold returns in the long-run for a holding period of three years. The results show that companies with moderately low leverage yield buy and hold abnormal returns of up to 20% in three years.

Keywords: Capital markets, leverage, forecasting, equity returns

Working Paper Series

Date posted: November 02, 2001 ; Last revised: November 07, 2001

Suggested Citation

Muradoglu, Yaz Gulnur and Whittington, Mark, Predictability of UK Stock Returns by Using Debt Ratios (October 2001). CUBS Finance Working Paper No. 05; Cass Business School Research Paper. Available at SSRN: http://ssrn.com/abstract=287653 or doi:10.2139/ssrn.287653

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Contact Information

Yaz Gulnur Muradoglu (Contact Author) City University London - Sir John Cass Business School ( email ) 106 Bunhill Row London EC1Y 8TZ United Kingdom +44 20 7040 0124 (Phone) +44 20 7040 8853 (Fax)
Mark Whittington Warwick Business School ( email ) Accounting and Finance Group Coventry CV4 7AL United Kingdom +44 1203 522138 (Phone) +44 1203 523 779 (Fax)