Original scientific paper

https://doi.org/10.1080/1331677X.2016.1160792

Financial leverage and stock returns: evidence from an emerging economy

Mirza Nawazish orcid.org/0000-0003-4265-9519
Birjees Rahat
Krishna Reddy orcid.org/0000-0002-7812-9141

Abstract

The aim of this research was to examine the propositions of Campbell
et al. and Mirza et al. on pricing of leverage in stock returns using a
comprehensive set of firms listed on the Karachi Stock Exchange (KSE) over a period of 13 years. Our results suggest that while size, value and, more importantly, financial leverage are systematic in nature, market risk premium is not a relevant factor. The results confirm the notion of leverage premium and have important implications for financial managers, investment analysts and other market participants who use asset pricing frameworks for investment appraisals. These findings have global relevance, notably for other emerging and developing economies where default risk is of importance due to cyclical nature of cash flows and low recovery rates owing to weaknesses of legal structure.

Keywords

Size; book to market; financial leverage

Hrčak ID:

171712

URI

https://hrcak.srce.hr/171712

Publication date:

22.12.2016.

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