Using Firm-Level Leverage as an Investment Strategy
Article first published online: 1 MAR 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 31, Issue 3, pages 260–279, April 2012
How to Cite
Muradoğlu, Y. G. and Sivaprasad, S. (2012), Using Firm-Level Leverage as an Investment Strategy. J. Forecast., 31: 260–279. doi: 10.1002/for.1221
- Issue published online: 20 MAR 2012
- Article first published online: 1 MAR 2011
- capital structure;
- stock returns;
- investment strategy;
We use an investment strategy based on firm-level capital structures. Investing in low-leverage firms yields abnormal returns of 4.43% per annum. If an investor holds a portfolio of low-leverage and low-market-to-book-ratio firms, abnormal returns increase to 16.18% per annum. A portfolio of low leverage and low market risk yields abnormal returns of 6.67% and a portfolio of small firms with low leverage earns 5.37% 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. Copyright © 2011 John Wiley & Sons, Ltd.