Leverage As A Weapon of Mass Shareholder-Value Destruction; Another Look at the Low-Beta Anomaly

42 Pages Posted: 26 Oct 2016 Last revised: 22 Dec 2016

Ari D. Andricopoulos

Dacharan Advisory AG

Date Written: November 1, 2016

Abstract

The 'low-beta' or 'low-volatility anomaly' is one of the most researched in the field of 'alternative beta'. Despite strong published evidence going back to the 1970s that high beta/volatility stocks underperform relative to expectations generated by the Capital Asset Pricing Model (CAPM), the anomaly still persists. The explanations given for this are all behavioural; that investor biases lead to overpricing of high volatility stocks. This paper shows that investor biases cannot be the explanation for the anomaly. Instead, it is proposed that the anomaly stems from a destruction of shareholder value. The strong implication is that the more market leverage a firm has, the more shareholder value is destroyed. Although the prevailing view for a long time has been that adding debt is good for shareholders, making balance sheets more 'efficient', there is in fact a considerable volume of evidence that the opposite is true; evidence which has been incorrectly interpreted for many years. Some possible mechanisms for this shareholder-value destruction are proposed.

Keywords: Low-Beta, Low-Volatility, Factor Investing

JEL Classification: G02, G11, G12, G14

Suggested Citation

Andricopoulos, Ari D., Leverage As A Weapon of Mass Shareholder-Value Destruction; Another Look at the Low-Beta Anomaly (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2859363

Ari Dimitri Andricopoulos (Contact Author)

Dacharan Advisory AG ( email )

Gubelstrasse 24
Zug, 6300
Switzerland
0041 41 763 2904 (Phone)

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