Using firm level leverage as an investment strategy

Muradoglu, Y.G. and Sivaprasad, S. 2012. Using firm level leverage as an investment strategy. Journal of Forecasting. 31 (3), pp. 260-279.

TitleUsing firm level leverage as an investment strategy
AuthorsMuradoglu, Y.G. and Sivaprasad, S.
Abstract

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.

JournalJournal of Forecasting
Journal citation31 (3), pp. 260-279
ISSN0277-6693
Year2012
PublisherWiley
Digital Object Identifier (DOI)doi:10.1002/for.1221
Publication dates
Published2012

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