The Pricing of Size, Book to Market and Financial Leverage in Euro Stocks

Bibliographic Data

ID15068069
AuthorsNazrat Mirza (0000-0003-4265-9519, Lahore School of Economics), Nawazish Mirza, Mawal Sara Saeed (Lahore School of Economics), Kumail Abbas Rizvi (Lahore School of Economics)
Year2013
Volume26
Issue2
Pages177-190
Publication date2013-01-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueEconomic Research-Ekonomska Istraživanja (JOURNAL)
Journal identifiersISSN: 1331-677X • E-ISSN: 1848-9664
PublisherInforma UK Limited (PUBLISHER • GB)
DOI10.1080/1331677x.2013.11517615
OpenAlexW1689604303
LanguageEN
Citations received5
References cited1

The relevance of financial leverage in a firm's capital structure holds great significance, however its role in asset pricing remains under investigated. In this paper we investigate if financial leverage is priced employing a sample of listed equities from nine European Union countries spanning over a period of twenty years (1989 - 2008). We form size, book to market, and leverage portfolios, to examine if leverage premium is systematic and whether augmenting the three factor model by including leverage variable would better explain the portfolio returns. Moreover, the paper investigates if size and value will capture financial distress in the presence of a superior measure based on net leverage. Our results suggest that the explanatory power of a four factor model is substantially superior to the "vanilla" version of a three factor model. Despite significant size and book to market coefficients, we could not find evidence that size and book to market factor capture financial distress in presence of a leverage mimicking factor

Business · Capital asset pricing model · Econometrics · Economics · Financial distress · Financial economics · Financial system · Market portfolio · Monetary economics · Portfolio · Auditing, Earnings Management, Governance · Corporate Finance and Governance · Financial Markets and Investment Strategies

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Open DOISci-HubOpen Access