Income statement leverage and expected stock returns

Sagi Akron and Roi D. Taussig

Finance Research Letters, 2022, vol. 47, issue PB

Abstract: In light of the ongoing debate regarding the classic financial-leverage measures' stock returns predictability power, this study posits a new financial leverage measure –namely, income statement leverage (ISL). Unlike market leverage (ML) and book leverage (BL) measures, ISL is not determined by market prices, thereby alleviating concerns regarding leverage's spurious return predictability, due to a "fad" in prices, which eventually degenerates. We show that ISL’s returns predictability remains statistically and economically significant, while simultaneously controlling for B/M, market-capitalization (Size), and past performance. Furthermore, while ML and BL returns predictability becomes insignificant or contradicts the tradeoff theory, ISL remains significant.

Keywords: Financial leverage; Return predictability; Book-to-Market (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000824

DOI: 10.1016/j.frl.2022.102766

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