Using firm-level leverage as an investment strategy

Article Type: Abstracts From: Strategic Direction, Volume 28, Issue 8

Muradoglu Y.G. and Sivaprasad S.Journal of Forecasting, April 2012, Vol. 31 No. 3, Start page: 260, No. of pages: 19

We use an investment strategy based on firm-level capital structures. Investing in low-leverage firms yields abnormal returns of 4.43 percent per annum. If an investor holds a portfolio of low-leverage and low-market-to-book-ratio firms, abnormal returns increase to 16.18 percent per annum. A portfolio of low leverage and low market risk yields abnormal returns of 6.67 percent and a portfolio of small firms with low leverage earns 5.37 percent per annum. We use the Fama-Macbeth (1973) methodology with modifications. We confirm that portfolios based on low leverage earn higher returns in longer investment horizons. Our results are robust to other risk factors and the risk class of the firm.Article type: Research paperISSN: 0277-6693Reference: 41AH896

Keywords: Capital structure, Industry, Investment strategy,Leverage, Risk, Stock returns