Leverage,Stock Returns,Taxes and Industry Concentration

27 Pages Posted: 23 Nov 2007 Last revised: 24 Feb 2010

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 investigate the effect of firm’s leverage on stock returns. We start with the explicit valuation model of Modigliani and Miller (1958) and expand the model by including other variables and undertaking a firm and portfolio level analysis. We show that stock returns decline in leverage and that the relation is linear. The Utilities sector is the exception. In this sector, returns increase in leverage. We show that the negative relation between leverage and stock returns holds for tax-paying firms and firms in competitive low-concentration industries.

Keywords: Leverage, stock returns, capital structure, taxes, industry concentration

JEL Classification: D21, G11, G32

Suggested Citation

Sivaprasad, Sheeja and Muradoglu, Yaz Gulnur, Leverage,Stock Returns,Taxes and Industry Concentration (November 2009). Available at SSRN: https://ssrn.com/abstract=1031987 or http://dx.doi.org/10.2139/ssrn.1031987

Sheeja Sivaprasad (Contact Author)

University of Westminster - Westminster Business School ( email )

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Yaz Gulnur Muradoglu

Queen Mary University of London ( email )

Francis Bancroft Building
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United Kingdom

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

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