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The Effect of Capital Structure on Abnormal Stock Returns: Evidence from Pakistan

Author

Listed:
  • Ihsan Ullah

    (FAST, National University of Computer and Emerging Sciences, Peshawar)

  • Attaullah Shah

    (Institute of Management Sciences, Peshawar)

Abstract

This study seeks an empirical investigation of the impact of financial leverage on abnormal stock returns of companies listed on the Karachi Stock Exchange. Using panel data over the period of 2005 to 2010, the study finds an existence of cross-sectional and time heterogeneity, and hence uses fixed effects regression model. The study reports an evidence of positive effect of leverage on stock returns. This evidence has several plausible explanations. Though based on varying underlying reasoning, yet agency theory, trade-off theory, bank debt signaling model, and management timing hypothesis predict favorable impact of leverage on stock returns. Therefore, the findings of this study are consistent with the predictions of all these theories

Suggested Citation

  • Ihsan Ullah & Attaullah Shah, 2014. "The Effect of Capital Structure on Abnormal Stock Returns: Evidence from Pakistan," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 6(1), pages 1-18, April.
  • Handle: RePEc:bec:imsber:v:6:y:2014:i:1:p:1-18
    DOI: dx.doi.org/10.22547/BER/6.1.1
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    References listed on IDEAS

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    Cited by:

    1. Imad Rahim & Attaullah Shah, 2019. "Corporate Financing and Firm Efficiency: A Data Envelopment Analysis Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 58(1), pages 1-25.
    2. Jalal Shah & Attaullah Shah, 2018. "Contrarian and Momentum Investment Strategies in Pakistan Stock Exchange," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 57(3), pages 253-282.

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    More about this item

    Keywords

    Financial leverage; abnormal stock returns; capital structure;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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