Leverage versus volatility: Evidence from the capital structure of European firms

AbdelKader EL Alaoui, Obiyathulla Ismath Bacha, Abul Masih and Mehmet Asutay

Economic Modelling, 2017, vol. 62, issue C, 145-160

Abstract: The impact of leverage on financial market stability and the relationship with the real economy is a key concern among researchers. This paper makes an initial attempt to investigate the relationship between a firm’s leverage, return and share price volatility from an Islamic finance perspective and capital structure theory. A multi-country dynamic panel framework and the mean-variance efficient frontier are applied to 320 sample firms from eight European countries, divided into portfolios of low and high debt using the shari’ah screening threshold of 33%. We find that the firm’s return and volatility change with changes in the capital structure. Islamic-compliant stocks show, in most cases, less volatility than non-compliant stocks but are no different in terms of return. Finally, our results tend to imply a case for limiting debt beyond certain levels.

Keywords: Volatility; Leverage; Islamic stocks; Mean-variance efficient frontier; Dynamic GMM; Wavelet time–frequency coherence analysis (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Leverage versus volatility: Evidence from the Capital Structure of European Firms (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:62:y:2017:i:c:p:145-160

DOI: 10.1016/j.econmod.2016.11.023

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