Leverage,Stock Returns,Taxes and Industry Concentration
27 Pages Posted: 23 Nov 2007 Last revised: 24 Feb 2010
Date Written: November 2009
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: Suggested Citation