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Income statement leverage and expected stock returns

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  • Akron, Sagi
  • Taussig, Roi D.

Abstract

In light of the ongoing debate regarding the classic financial-leverage measures' stock returns predictability power, this study posits a new financial leverage measure –namely, income statement leverage (ISL). Unlike market leverage (ML) and book leverage (BL) measures, ISL is not determined by market prices, thereby alleviating concerns regarding leverage's spurious return predictability, due to a "fad" in prices, which eventually degenerates. We show that ISL’s returns predictability remains statistically and economically significant, while simultaneously controlling for B/M, market-capitalization (Size), and past performance. Furthermore, while ML and BL returns predictability becomes insignificant or contradicts the tradeoff theory, ISL remains significant.

Suggested Citation

  • Akron, Sagi & Taussig, Roi D., 2022. "Income statement leverage and expected stock returns," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000824
    DOI: 10.1016/j.frl.2022.102766
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial leverage; Return predictability; Book-to-Market;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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