Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence

  • Author(s): LAXMI CHAND BHANDARI
  • Published: Apr 30, 2012
  • Pages: 507-528
  • DOI: 10.1111/j.1540-6261.1988.tb03952.x

ABSTRACT

The expected common stock returns are positively related to the ratio of debt (non‐common equity liabilities) to equity, controlling for the beta and firm size and including as well as excluding January, though the relation is much larger in January. This relationship is not sensitive to variations in the market proxy, estimation technique, etc. The evidence suggests that the “premium” associated with the debt/equity ratio is not likely to be just some kind of “risk premium”.

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