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Leverage versus volatility: Evidence from the capital structure of European firms

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  • el Alaoui, AbdelKader O.
  • Ismath Bacha, Obiyathulla
  • Masih, Mansur
  • Asutay, Mehmet

Abstract

The impact of leverage on financial market stability and the relationship with the real economy is a key concern among researchers. This paper makes an initial attempt to investigate the relationship between a firm’s leverage, return and share price volatility from an Islamic finance perspective and capital structure theory. A multi-country dynamic panel framework and the mean-variance efficient frontier are applied to 320 sample firms from eight European countries, divided into portfolios of low and high debt using the shari’ah screening threshold of 33%. We find that the firm’s return and volatility change with changes in the capital structure. Islamic-compliant stocks show, in most cases, less volatility than non-compliant stocks but are no different in terms of return. Finally, our results tend to imply a case for limiting debt beyond certain levels.

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  • el Alaoui, AbdelKader O. & Ismath Bacha, Obiyathulla & Masih, Mansur & Asutay, Mehmet, 2017. "Leverage versus volatility: Evidence from the capital structure of European firms," Economic Modelling, Elsevier, vol. 62(C), pages 145-160.
  • Handle: RePEc:eee:ecmode:v:62:y:2017:i:c:p:145-160
    DOI: 10.1016/j.econmod.2016.11.023
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    2. Yang Yang & Michael Rehm & Mingquan Zhou, 2021. "Housing Price Volatility: What's the Difference between Investment and Owner‐Occupancy?," The Economic Record, The Economic Society of Australia, vol. 97(319), pages 548-563, December.
    3. Ramli, Nur Ainna & Latan, Hengky & Solovida, Grace T., 2019. "Determinants of capital structure and firm financial performance—A PLS-SEM approach: Evidence from Malaysia and Indonesia," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 148-160.

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    More about this item

    Keywords

    Volatility; Leverage; Islamic stocks; Mean-variance efficient frontier; Dynamic GMM; Wavelet time–frequency coherence analysis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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