An Investment Strategy Based on Leverage: Evidence from BSE 500

摘要

This article examines the value relevance of leverage to equity investors. We construct a short-term investment strategy based on leverage of Indian firms over a 10-year period. We examine the ability of leverage to predict stock returns by analysing the cumulative abnormal returns (ARs) for a holding period of 1 year. We show that returns increase in leverage. Robustness tests are carried out to examine the returns in excess of those attainable using firm characteristics, such as, size, price to book, price-earnings (P/E) and dividend yield (DY). Our findings show that portfolios based on size and leverage can yield an excess return of up to 23 per cent.