How Does a Firm's Capital Structure Affect Stock Performance?

31 Pages Posted: 12 Jul 2015

See all articles by Roberta Adami

Roberta Adami

Westminster Business School

Orla Gough

University of Westminster - Business School

Yaz Gulnur Muradoglu

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

Sheeja Sivaprasad

University of Westminster - Westminster Business School

Date Written: 2013

Abstract

This paper examines the relationship between capital structure and shareholder returns in the UK between 1980 and 2008. Expanding on Modigliani and Miller’s (1958) Proposition 2, returns are estimated using the asset pricing models of CAPM, Fama and French and of Carhart. The analysis shows that gearing (in the form of debt finance) is a characteristic that influences stock returns and that, in contrast to accepted finance theory, is negatively related to estimated returns. This relationship is tested empirically for robustness with other risk factors such as corporate tax rates and industry concentration, the results remain consistent throughout the analysis. If confirmed, the negative impact of debt financing on shareholder returns should trigger a major rethink on corporate financing strategies.

Keywords: Stock Returns, Gearing, Asset Pricing Models, Risk Factors

JEL Classification: G12, G14, G17, G32

Suggested Citation

Adami, Roberta and Gough, Orla and Muradoglu, Yaz Gulnur and Sivaprasad, Sheeja, How Does a Firm's Capital Structure Affect Stock Performance? (2013). Frontiers in Finance and Economics, Vol. 12, No. 1, 1-31, 2013. Available at SSRN: https://ssrn.com/abstract=2629231

Roberta Adami

Westminster Business School ( email )

35 Marylebone Road
London NW1 5LS
United Kingdom

Orla Gough

University of Westminster - Business School ( email )

309 Regent Street
London, W1R 8AL
United Kingdom

Yaz Gulnur Muradoglu

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)

Sheeja Sivaprasad (Contact Author)

University of Westminster - Westminster Business School ( email )

35 Marylebone Road
London NW1 5LS, NW1 5LS
Great Britain
0207 911 5000 Ext3157 (Phone)

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