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A Behavioural Finance Explanation of a Gearing-ß Inverse Association Referencing Weill’s Liquidity Result (in English)

Author

Listed:
  • Edward J. Lusk

    (The State University of New York, College of Business and Economics, Plattsburgh, NY, USA and The Wharton School of the University of Pennsylvania, Philadelphia, PA, USA)

  • Michael HALPERIN

    (The Lippincott Library of the Wharton School of the University of Pennsylvania, Philadelphia, PA, USA)

  • Li Yue

    (The Otto-von-Guericke University, Magdeburg Germany)

Abstract

The authors investigated Arnold’s conjecture that Leverage (Financial Gearing) and Operating Gearing should be positively related to the equity ß of the Sharpe/Lintner CAPM. They find for a sample of the S&P 500 firms that have been on that index continuously for more than 15 years, that ß is negatively associated with Leverage and Operating Gearing. Using Weill’s results for transitional economies, the authors suggest that liquidity may provide an explanation for this anomalous ß-Gearing inversion. The implications are: that (1) one should revaluate the positive associations posited for Financial and Operating gearing with ß and (2) consider the possibility of managing liquidity as a way to affect ß.

Suggested Citation

  • Edward J. Lusk & Michael HALPERIN & Li Yue, 2006. "A Behavioural Finance Explanation of a Gearing-ß Inverse Association Referencing Weill’s Liquidity Result (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 56(3-4), pages 168-177, March.
    • Handle: RePEc:fau:fauart:v:56:y:2006:i:3-4:p:168-177
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    References listed on IDEAS

    as
    1. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    2. Venkat R. Eleswarapu, 2004. "The Predictability of Aggregate Stock Market Returns: Evidence Based on Glamour Stocks," The Journal of Business, University of Chicago Press, vol. 77(2), pages 275-294, April.
    3. Laurent Weill, 2004. "What Determines Leverage in Transition Countries?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 54(5-6), pages 234-242, May.
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    More about this item

    Keywords

    financial gearing; leverage; liquidity; beta;
    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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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