Work

How does a firm's capital structure affect stock performance?

Year: 2015

Type: preprint

Abstract: This paper examines the relationship between capital structure and shareholder returns in the UK between 1980 and 2008. Expanding on Modigliani and Miller’s (1958) Proposition 2, returns are estimated using the asset pricing models of CAPM, Fama and French and of Carhart. The analysis shows that gearing (in the form of debt finance) is a characteristic that influences stock returns and that, in contrast to accepted finance theory, is negatively related to estimated returns. This relationship is tested empirically for robustness with other risk factors such as corporate tax rates and industry concentration, the results remain consistent throughout the analysis. If confirmed, the negative impact of debt financing on shareholder returns should trigger a major rethink on corporate financing strategies.

Source: SSRN Electronic Journal

Authors: Sheeja Sivaprasad, Roberta Adami, Orla Gough, Yaz Gülnur Muradoğlu

Institutions: University of Westminster, Queen Mary University of London, City, University of London

Language: English

Topic: Corporate Finance and Governance

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2182349686

Cites: 59

Cited by: 2

Related to: 10