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The Impact of Financial Leverage on the Variance of Stock Returns

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  • David Yechiam Aharon

    (Department of Business Administration, Ono Academic College, Haifa 55000, Israel)

  • Yossi Yagil

    (Department of Business Administration, University of Haifa, Haifa 3498838, Israel
    Department of Business Administration, Western Galilee College, Akko 2412101, Israel)

Abstract

This paper investigates the direct theoretical relationship between the variance of stock returns (σ 2 E ) and financial leverage (L) considering both corporate and personal taxes. Using a dataset of U.S. industrial firms, we examine the variance of stock returns as a function of the firm’s financial leverage. We demonstrate that (1) the variance of stock returns is positively related to the firm’s financial leverage, (2) the relationship between the variance of stock returns and financial leverage is positive when corporate and personal taxes are also considered, and (3) with regard to the relationship between the variance of stock returns and financial leverage, using market measures of the latter tends to generate a higher coefficient of determination and a more accurate approximation of the theoretical relationship between financial leverage and the variance of stock returns.

Suggested Citation

  • David Yechiam Aharon & Yossi Yagil, 2019. "The Impact of Financial Leverage on the Variance of Stock Returns," IJFS, MDPI, vol. 7(1), pages 1-18, March.
    • Handle: RePEc:gam:jijfss:v:7:y:2019:i:1:p:14-:d:211533
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    4. Khadija Younas & Muhammad Sarmad, 2020. "The Impact Of Degree Of Financial Leverage And Degree Of Operating Leverage On The Systematic Risk Of Common Stock," Malaysian E Commerce Journal (MECJ), Zibeline International Publishing, vol. 4(1), pages 24-32, April.

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