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Financial leverage and stock return comovement

Author

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  • Do, Hung X.
  • Nguyen, Nhut H.
  • Nguyen, Quan M.P.
Abstract
Leverage-initiating stocks experience an increase in return comovement with leveraged stocks and a decrease in return comovement with zero-leverage stocks in the year after the leverage initiation event. Conversely, stocks that fully deleverage comove more with their new peers of zero-leverage stocks and less with their old peers of leveraged stocks. These findings are robust after controlling for common factors and firm characteristics and using various time series and events as exogenous shocks to corporate leverage decisions. Our findings can be explained by investor clienteles for financial leverage and are not driven by omitted variables and other characteristic-induced comovements.

Suggested Citation

  • Do, Hung X. & Nguyen, Nhut H. & Nguyen, Quan M.P., 2022. "Financial leverage and stock return comovement," Journal of Financial Markets, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finmar:v:60:y:2022:i:c:s1386418121000720
    DOI: 10.1016/j.finmar.2021.100699
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    Cited by:

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    More about this item

    Keywords

    Leverage; Comovement; Clientele;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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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