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Would You Follow MM or a Profitable Trading Strategy?

Gulnur Muradoglu Brian Baturevich ()
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Gulnur Muradoglu Brian Baturevich: Minho University, Portugal.

Frontiers in Finance and Economics, 2010, vol. 7, issue 2, 69-89

Abstract: We investigate the ability of company capital structures to be used as a predictor for abnormal returns. We carry out robustness tests to determine the predictive ability of debt ratios, controlling for size of company, price-toearnings (PE) ratio, market-to-book value ratio (MTBV) and beta. We show that companies in the lowest leverage decile, exhibit the highest abnormal returns – 17% over a three-year period. A strategy of choosing the smallest companies with the lowest leverage yields cumulative abnormal returns (CARs) in excess of 80% over three years.

Keywords: Capital Structure; leverage; abnormal returns; trading strategy (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2010
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