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The impacts of leverage, price book ratio, dividend yield and past performance on stock returns

  • Considering mixed results of several studies that analyse the influence of total leverage on stock returns, we focus on a more differentiated ratio in our approach: 'total debt to (total capital + long term debt)' [TD/(TC + LTD)] which treats short- and long-term debt differently. In this article, we employ an iestment strategy on the German stock market that is based on TD/(TC + LTD) as well as price to book, dividend yield and past stock performance. Interestingly, the relation between TD/(TC + LTD) and stock returns is negative and highly significant. That is essential because it contradicts one of the basic principles in traditional financial theory. Price book is negatively and dividend yield is positively related to returns. Looking at past performance, we find a significant short-term momentum and long-term contrarian pattern. On balance, those variables impact returns critically. Furthermore, we analyse the question whether differences in returns are a compensation for risk taking._x000D_ Keywords Stock returns; leverage; debt maturity; price book ratio; dividend yield; momentum effect; contrarian effect; past performance; iestment strategy; Germany; stock markets; risk taking.

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Document Type:Article
Author:Alexander Schüßler
Chairs and Professorships:Chair of Accounting and Auditing
Year of Completion:2014
In: International Journal of Accounting and Finance, 4 (2014) 4, 341 - 357