The Effect of Capital Structure on Abnormal Stock Returns: Evidence from Pakistan

Ihsan Ullah () and Attaullah Shah ()
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Ihsan Ullah: FAST, National University of Computer and Emerging Sciences, Peshawar

Business & Economic Review, 2014, vol. 6, issue 1, 1-18

Abstract: This study seeks an empirical investigation of the impact of financial leverage on abnormal stock returns of companies listed on the Karachi Stock Exchange. Using panel data over the period of 2005 to 2010, the study finds an existence of cross-sectional and time heterogeneity, and hence uses fixed effects regression model. The study reports an evidence of positive effect of leverage on stock returns. This evidence has several plausible explanations. Though based on varying underlying reasoning, yet agency theory, trade-off theory, bank debt signaling model, and management timing hypothesis predict favorable impact of leverage on stock returns. Therefore, the findings of this study are consistent with the predictions of all these theories

Keywords: Financial leverage; abnormal stock returns; capital structure (search for similar items in EconPapers)
JEL-codes: G10 G21 G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bec:imsber:v:6:y:2014:i:1:p:1-18

DOI: 10.22547/BER/6.1.1

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