Would You Follow MM or a Profitable Trading Strategy?

21 Pages Posted: 17 Dec 2010

See all articles by Yaz Gulnur Muradoglu

Yaz Gulnur Muradoglu

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

Brian Baturevich

affiliation not provided to SSRN

Date Written: October 1, 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.

Keywords: Capital Structure, leverage, abnormal returns, trading strategy

JEL Classification: G11, G12, G17

Suggested Citation

Muradoglu, Yaz Gulnur and Baturevich, Brian, Would You Follow MM or a Profitable Trading Strategy? (October 1, 2010). Frontiers in Finance and Economics, Vol. 7, No. 2, 69-89, October 2010. Available at SSRN: https://ssrn.com/abstract=1727263

Yaz Gulnur Muradoglu (Contact Author)

Queen Mary University of London ( email )

Francis Bancroft Building
Mile End Road
London, E1 4NS
United Kingdom

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)

Brian Baturevich

affiliation not provided to SSRN ( email )

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