The Information Content of Changes in Financial Leverage

49 Pages Posted: 1 Sep 2003

See all articles by Valentin Dimitrov

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems

Prem C. Jain

Georgetown University

Date Written: August 12, 2003

Abstract

We show a significantly negative association between changes in financial leverage and contemporaneous risk-adjusted stock returns. The results are consistent with the hypothesis that changes in financial leverage are affected by and, therefore, signal changes in underlying operating performance. Furthermore, we find that changes in financial leverage are also negatively associated with future risk-adjusted returns. We show that changes in financial leverage are correlated with future changes in return on equity, which may partially explain the anomalous pattern in future returns.

Keywords: Financial Leverage, Stock Returns, Operating Performance, Value Relevance

JEL Classification: G12, G14, G32, M41

Suggested Citation

Dimitrov, Valentin and Jain, Prem C., The Information Content of Changes in Financial Leverage (August 12, 2003). Available at SSRN: https://ssrn.com/abstract=433820 or http://dx.doi.org/10.2139/ssrn.433820

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
Newark, NJ 07102
United States

Prem C. Jain (Contact Author)

Georgetown University ( email )

McDonough School of Business
Georgetown Univeristy
Washington, DC 20057
United States
202-697-9455 (Phone)

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