Leverage and stock returns in emerging markets: the case of South Africa
Date
2014-08-29
Authors
Forichi, Cephas
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Abstract
This study models leverage-cum-stock returns in emerging markets using South
African data. The topic on leverage-cum-stock returns has received much attention
from researchers with both empirical and theoretical findings showing mixed results.
This study shows that there is a positive relationship between leverage and stock
returns. Beta is not the only priceable risk borne by investors, there is a reward also
for bearing leverage. High leverage levels entails high asset base, which is an
indicator of future growth opportunities. Firms with high asset base, take a gamble by
investing heavily in risky but highly rewarding investments. Risky appetite investors
are then rewarded with high stock prices leading to high stock returns. It is important
to note that highly levered firms are risky. There are costs associated with debt
financing, for instance, contractual debt servicing commitments and high chances of
default risk. Investors should be compensated for bearing this risk by higher stock
prices. Debt-related characteristics are also incorporated in the study to fully model
leverage-cum-stock returns. These variables are change in size measured by market
capitalization, age of a firm and interest rates. Stock returns are negatively related to
age of a firm and interest rates whilst positively related to change in size.
Description
Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2014.