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Low Versus High Leverage (LVH)

Author

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  • Bebel, Arkadiusz

Abstract

Disputes whether financial structure can create value or not were started more than 50 years ago with Modigliani Miller theorem. In this paper I would like to present my own view on level of debt in value creation process. What I am going to prove is that due to expansion option companies with low level of debt are outperforming highly leveraged companies in the long run. I have created a new factor LVH (low versus high leverage) to quantitatively prove that being long in companies with below median net debt/EBITDA and being short in companies with above net debt/EBITDA can bring abnormal returns (with Sharpe ratio even higher than 0.9 and statistically significant alfa of around 7.7% yearly). As shown in chapter IV.II. such strategy might be supplemented by Momentum, Betting against Beta or High minus Low Devil strategies.

Suggested Citation

  • Bebel, Arkadiusz, 2014. "Low Versus High Leverage (LVH)," MPRA Paper 62889, University Library of Munich, Germany, revised 08 Nov 2014.
    • Handle: RePEc:pra:mprapa:62889
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    factor investing; quantitative strategy; net debt; leverage; Modigliani-Miller; value creation; alfa;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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