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Would You Follow MM or a Profitable Trading Strategy?


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  • Brian Baturevich, Gulnur Muradoglu

    (Minho University, Portugal.)

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    We 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 Info

    Article provided by SKEMA Business School in its journal Frontiers in Finance and Economics.

    Volume (Year): 7 (2010)
    Issue (Month): 2 (October)
    Pages: 69-89

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    Handle: RePEc:ffe:journl:v:7:y:2010:i:2:p:69-89

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    Related research

    Keywords: Capital Structure; leverage; abnormal returns; trading strategy;

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