The Impact of Financial Leverage on the Variance of Stock Returns

David Yechiam Aharon and Yossi Yagil
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David Yechiam Aharon: Department of Business Administration, Ono Academic College, Haifa 55000, Israel
Yossi Yagil: Department of Business Administration, University of Haifa, Haifa 3498838, Israel

IJFS, 2019, vol. 7, issue 1, 1-18

Abstract: This paper investigates the direct theoretical relationship between the variance of stock returns (σ 2 E ) and financial leverage (L) considering both corporate and personal taxes. Using a dataset of U.S. industrial firms, we examine the variance of stock returns as a function of the firm’s financial leverage. We demonstrate that (1) the variance of stock returns is positively related to the firm’s financial leverage, (2) the relationship between the variance of stock returns and financial leverage is positive when corporate and personal taxes are also considered, and (3) with regard to the relationship between the variance of stock returns and financial leverage, using market measures of the latter tends to generate a higher coefficient of determination and a more accurate approximation of the theoretical relationship between financial leverage and the variance of stock returns.

Keywords: volatility; financial leverage; market imperfections; corporate taxes; personal taxes (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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