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Why do firms with no leverage still have leverage and volatility feedback effects?

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  • Smith, Geoffrey Peter

Abstract

The leverage effect hypothesis of Black (1976) and Christie (1982) posits that time-series variation in debt causes an inverse relation between stock return volatility and stock returns. Hasanhodzic and Lo (2019) test this hypothesis in a novel sample of firms with no debt and yet they still find an inverse relation, motivating them to espouse volatility feedback as an alternative. Under standard assumptions governing the risk-return relation from the asset pricing literature, I explain why the stock returns of all-equity-financed firms will still have leverage effects on par with those of debt-financed firms and why the absence of debt at the firm level has no bearing on the leverage and volatility feedback hypotheses.

Suggested Citation

  • Smith, Geoffrey Peter, 2024. "Why do firms with no leverage still have leverage and volatility feedback effects?," Journal of Empirical Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:empfin:v:78:y:2024:i:c:s0927539824000513
    DOI: 10.1016/j.jempfin.2024.101516
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    More about this item

    Keywords

    Leverage effect; Volatility feedback effect; All-equity-financed firms;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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