Leverage, Maturities of Debt and Stock Performance

Authors

  • Tristan Nguyen WHL Graduate School of Business and Economics, Germany
  • Alexander Schüßler HHL Leipzig Graduate School of Management, Germany

DOI:

https://doi.org/10.32890/ijbf2013.10.1.4

Keywords:

Stock returns, Leverage, Debt maturity, Long term debt, Short term debt

Abstract

We add to the prior literature that test the influence of total leverage on stock returns by focusing on an extended ratio, namely, ‘Total Debt to (Total Capital + Long Term Debt)’, TD/(TC+LTD)’, the ratio henceforth. Further, and in contrast with others, we account for different maturities of debt. The link between this ratio and stock returns for periods of one to sixty months are considered for Germany, the UK and the US. We control for beta and form quintiles based on the ratio to compute mean returns. Our findings indicate a robust negative relation between the ratio and returns for Germany and the UK. In these two markets, the lowest ratio-quintile performs better that the highest ratio-quintile for all the periods studied. Interestingly, the results for the United States are less clear. Due to a number of known factors, market efficiency might be higher in the US than in the other two markets.

 

References

Arditti, F. D., (1967). Risk and return on equity. Journal of Finance, 22 (1): 19-36.

Bhandari, L. C., (1988). Debt/equity ratio and expected common stock returns: empirical evi-dence. Journal of Finance, 43: 507-528.

Butler, K. C., and Malaikah, S. J., (1992). Efficiency and inefficiency in thinly traded stock mar-kets: Kuwait and Saudi Arabia. Journal of Banking and Finance, 16 (2): 197-210.

Campbell J. Y., Lo A. W., and MacKinlay A. C., (1997). The Econometrics of Financial Markets (1st ed.). Princeton: Princeton University Press: 149-178.

Carlson, M., Fisher, A., and Giammarino, R., (2004). Corporate investment and asset price dy-namics: implications for the cross-section of returns. Journal of Finance, 59: 2577–2603.

Caskey, J., Hughes, J. S., and Liu, J., (2012). Leverage, excess leverage and future returns. Re-view of Accounting Studies, 17: 443-471.

Chen, L., Novy-Marx, R., and Zhang, L., (2010). An alternative three-factor model. Working paper. Available at SSRN: http://dx.doi.org/10.2139/ssrn.1418117.

Claessens, S., Dasgupta, S., and Glen, J., (1995). Return behavior in emerging stock markets. The World Bank Economic Review, 9 (1): 131-51.

DeBondt, W., and Thaler, R., (1987). Further evidence on investor overreaction and stock mar-ket seasonality. Journal of Finance, 42: 557-581.

Dhaliwal, D. S., Heitzman, S., and Zhen L. O., (2006). Taxes, leverage, and the cost of equity capital. Journal of Accounting Research, 44 (4): 691–723.

George T., and Hwang C., (2009). Leverage, financial distress and the cross section of stock re-turns. Journal of Financial Economics, 96 (1): 56-79.

Gombola, M. J., and Liu, F. J., (1993). Dividend yields and stock returns: evidence of time varia-tion between bull and bear markets. Financial Review, 28: 175-192.

Graham, J. R., and Harvey, C. R., (2001). The theory and practice of corporate finance: evidence from the field. Journal of Financial Economics, 60: 187-243.

Grinblatt, M., and Han, B., (2004). Prospect theory, mental accounting, and momentum. Journal of Financial Economics, 78 (2): 311-339.

Keppler, A. M., (1991). The importance of dividend yields in country selection. Journal of Port-folio Management, 17: 24-29.

Korteweg, A., (2004). Financial leverage and expected stock returns: evidence from pure ex-change offers. Working paper. Available at SSRN: http://dx.doi.org/10.2139/ssrn.597922

Kose, E., (2011). Dissecting the leverage effect on stock returns. Working paper. Available at:http://www.business.uconn.edu/finance/seminars/papers/Dissecting%20the%20Leverage %20Effect%20on%20Stock%20Returns.pdf

Miller, M., (1977). Debt and taxes. Journal of Finance, 32: 261–275.

Modigliani, F., and Miller, M., (1958), The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48 (3): 261–297.

Modigliani, F., and Miller, M., (1963). Corporate income taxes and the cost of capital: a correction. American Economic Review, 53: 433–443.

Muradoglu, Y., and Sivaprasad, S., (2012a). Using firm level leverage as an investment strategy. Journal of Forecasting, 31: 260-279.

Muradoglu, Y., and Sivaprasad, S., (2012b). Capital structure and abnormal returns. Internation-al Business Review, 21: 328-341.

Patel, P., Yao, S., and Barefoot, H., (2006). High yield, low payout, Credit Suisse Quantitative Equity Research.

Penman, S. H., Richardson, S. A., and Tuna, I., (2007). The book-to-price effect in stock returns: accounting for leverage. Journal of Accounting Research, 45 (2): 427-467.

World Federation of Exchanges (2012). 2011 WFE market highlights, retrieved June 14, 2012 from http://www.world-exchanges.org/files/file/stats%20and%20charts/2011% 20WFE%20Market%20Highlights.pdf

Downloads

Published

28-03-2013

Issue

Vol. 10 No. 1 (2013): International Journal of Banking and Finance (IJBF) Vol. 10, No.1, 2013

Section

Articles

How to Cite

Nguyen, T., & Schüßler, A. (2013). Leverage, Maturities of Debt and Stock Performance. International Journal of Banking and Finance, 10(1), 74-93. https://doi.org/10.32890/ijbf2013.10.1.4

Research impact

Harvested 2026-09-07
6 citations, from OpenAlex — the highest of the sources checked

Counts differ between services because each indexes a different body of literature. None of them is the whole picture.

Identifiers DOI 10.32890/ijbf2013.10.1.4 OpenAlex W89077634