Predictability of UK Stock Returns by Using Debt Ratios

CUBS Finance Working Paper No. 05

Cass Business School Research Paper

23 Pages Posted: 2 Nov 2001

See all articles by Yaz Gulnur Muradoglu

Yaz Gulnur Muradoglu

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

Mark Whittington

Warwick Business School

Date Written: October 2001

Abstract

The purpose of this study is to examine the ability of debt ratios in predicting company performance and stock returns in the long run. The U.K. companies included in the FTSE-350 index for the past ten years constitute our sample. We rank the companies according to the degree of leverage that they have. Then we examine the predictive ability of the debt burden for shareholder wealth by investigating the cumulative abnormal returns and buy and hold returns in the long-run for a holding period of three years. The results show that companies with moderately low leverage yield buy and hold abnormal returns of up to 20% in three years.

Keywords: Capital markets, leverage, forecasting, equity returns

Suggested Citation

Muradoglu, Yaz Gulnur and Whittington, Mark, Predictability of UK Stock Returns by Using Debt Ratios (October 2001). CUBS Finance Working Paper No. 05; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=287653 or http://dx.doi.org/10.2139/ssrn.287653

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)

Mark Whittington

Warwick Business School ( email )

Accounting and Finance Group
Coventry CV4 7AL
United Kingdom
+44 1203 522138 (Phone)
+44 1203 523 779 (Fax)

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