Would You Follow MM or a Profitable Trading Strategy?
AbstractWe investigate the ability of company capital structures to be used as a predictor for abnormal returns. We carry out robustness tests to determine the predictive ability of debt ratios, controlling for size of company, price-toearnings (PE) ratio, market-to-book value ratio (MTBV) and beta. We show that companies in the lowest leverage decile, exhibit the highest abnormal returns – 17% over a three-year period. A strategy of choosing the smallest companies with the lowest leverage yields cumulative abnormal returns (CARs) in excess of 80% over three years.
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Bibliographic InfoArticle provided by SKEMA Business School in its journal Frontiers in Finance and Economics.
Volume (Year): 7 (2010)
Issue (Month): 2 (October)
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Capital Structure; leverage; abnormal returns; trading strategy;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
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