Using Firm Level Leverage as an Investment Strategy

33 Pages Posted: 20 Nov 2007 Last revised: 22 Jun 2016

See all articles by Sheeja Sivaprasad

Sheeja Sivaprasad

University of Westminster - Westminster Business School

Yaz Gulnur Muradoglu

Queen Mary University of London; City University London - Sir John Cass Business School

Date Written: November 2009

Abstract

We use an investment strategy based on firm level capital structures. Investing in low leverage firms yields abnormal returns of 4.43 percent per annum. If an investor holds a portfolio of low leverage and low market to book ratio firms abnormal returns increase to 16.18 percent per annum. A portfolio of low leverage and low market risk yields abnormal returns of 6.67 percent and a portfolio of small firms with low leverage earns 5.37 percent per annum. We use the Fama-Macbeth (1973) methodology with modifications. We confirm that portfolios based on low leverage earn higher returns in longer investment horizons. Our results are robust to other risk factors and the risk class of the firm. JEL: G11, G17, G32 Keywords: Leverage; Capital Structure; Stock Returns; Industry; Investment Strategy; Risk; Size

Keywords: Leverage, Capital Structure, Stock Returns, Industry, Investment Strategy, Risk, Size

JEL Classification: G31, G32

Suggested Citation

Sivaprasad, Sheeja and Muradoglu, Yaz Gulnur, Using Firm Level Leverage as an Investment Strategy (November 2009). Available at SSRN: https://ssrn.com/abstract=1031198 or http://dx.doi.org/10.2139/ssrn.1031198

Sheeja Sivaprasad

University of Westminster - Westminster Business School ( email )

35 Marylebone Road
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Yaz Gulnur Muradoglu (Contact Author)

Queen Mary University of London ( email )

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United Kingdom

City University London - Sir John Cass Business School ( email )

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