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The impacts of leverage, price book ratio, dividend yield and past performance on stock returns
(2014)
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.
This article is about three widespread and far-reaching mistakes in financial markets, namely, the Equity Home Bias, Anchoring and Herding. We use a combination of two different sources, survey answers and actual trading patterns, in order to analyze those mistakes empirically. This two-pronged approach allows us to discover interrelations between talk and action and provides a robustness check for our findings. Equity Home Bias is more predominant in real trading than iestors admit in the questionnaire. In addition to domestic stocks, German iestors also overweight Non-German Eurozone stocks. Consequently, iestors hold an astonishing 82.13 per cent of their portfolio in stocks denominated in Euro. Anchoring in the survey is positively correlated with the Disposition Effect in actual trading. We ask iestors if they allow themselves to be influenced by others, and we demonstrate that there is a positive link between affirmative answers and Herding in real action. In addition, we study whether behavioral differences exist between various socio-demographic groups. Higher educated iestors are less inclined to exhibit the Equity Home Bias, Anchoring and Herding. Whereas gender hardly influences biases, interestingly, age is positively related to Equity Home Bias but negatively related to the other two biases.
This article reviews the literature in the field of Behavioral Corporate Finance. For reasons of simplicity, we distinguish between two approaches. The first approach focuses on the analysis of irrational behavior of managers in the context of efficient financial markets. Many empirical studies discover systematic irrational managerial behavior. The second approach regards rational manager decisions in the context ofinefficient markets. The analysis focuses on situations where iestors are systematically irrational taking rational and well-informed managers as given. Interestingly, Behavioral Corporate Finance is able to explain many empirical observations that cannot be explained by traditional Corporate Finance. In reality, both managers and iestors act to some extent irrationally. Therefore, we make recommendations to both groups in order to improve their decision making. In contrast to other papers, we give specific recommendations for both managers and iestors. With the help of these recommendations, managers and iestors are able to improve decision-making to their mutual advantage.
We add to the prior literature that test the influence of total leverage on stock returns by focusing on an extended ratio, namely, ‘Total Debt to (Total Capital + Long Term Debt)’,TD/(TC+LTD)’, the ratio henceforth. Further, and in contrast with others, we account for differ-ent maturities of debt. The link between this ratio and stock returns for periods of one to sixty months are considered for Germany, the UK and the US. We control for beta and form quintiles based on the ratio to compute mean returns. Our findings indicate a robust negative relation be-tween the ratio and returns for Germany and the UK. In these two markets, the lowest ratio-quintile performs better than the highest ratio-quintile for all the periods studied. Interestingly, the results for the United States are less clear. Due to a number of known factors, market efficiency might be higher in the US than in the other two markets.