International evidence on the association of leverage with stock returns and the value premium

García-Feijóo, L., & Jansen, B. A. (2022). International evidence on the association of leverage with stock returns and the value premium. Financial Review, 00, 1– 27. https://doi.org/10.1111/fire.12320

40 Pages Posted: 5 Aug 2020 Last revised: 19 Jan 2023

See all articles by Benjamin Jansen

Benjamin Jansen

Middle Tennessee State University - Department of Economics and Finance

Luis García-Feijóo

Florida Atlantic University - Department of Finance

Date Written: August 16, 2022

Abstract

We use an international sample to test theories predicting an association between operating and financial leverage with stock returns and the value premium. We find evidence that operating and financial leverage are related to stock returns and the value premium across the sampled countries. Results hold after considering the trade-off between financial and operating leverage and are stronger in North American and European subsamples. Consistent with theory, we find that a country’s labor share is positively associated with the value premium. Overall, we present evidence suggesting the value premium reflects compensation for exposure to systematic operating and financing risk.

Keywords: financial leverage, international, macroeconomy, operating leverage, stock return, value premium

JEL Classification: G12, G15

Suggested Citation

Jansen, Benjamin and Garcia-Feijoo, Luis, International evidence on the association of leverage with stock returns and the value premium (August 16, 2022). García-Feijóo, L., & Jansen, B. A. (2022). International evidence on the association of leverage with stock returns and the value premium. Financial Review, 00, 1– 27. https://doi.org/10.1111/fire.12320 , Available at SSRN: https://ssrn.com/abstract=3646542 or http://dx.doi.org/10.2139/ssrn.3646542

Benjamin Jansen (Contact Author)

Middle Tennessee State University - Department of Economics and Finance ( email )

Murfreesboro, TN 37132
United States

Luis Garcia-Feijoo

Florida Atlantic University - Department of Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States
954-236-1239 (Phone)

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