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The Impact of Financial Leverage on the Variance of Stock Returns

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Department of Business Administration, Ono Academic College, Haifa 55000, Israel
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Department of Business Administration, University of Haifa, Haifa 3498838, Israel
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Department of Business Administration, Western Galilee College, Akko 2412101, Israel
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Author to whom correspondence should be addressed.
Int. J. Financial Stud. 2019, 7(1), 14; https://doi.org/10.3390/ijfs7010014
Received: 10 January 2019 / Revised: 25 February 2019 / Accepted: 28 February 2019 / Published: 6 March 2019
This paper investigates the direct theoretical relationship between the variance of stock returns (σ2E) and financial leverage (L) considering both corporate and personal taxes. Using a dataset of U.S. industrial firms, we examine the variance of stock returns as a function of the firm’s financial leverage. We demonstrate that (1) the variance of stock returns is positively related to the firm’s financial leverage, (2) the relationship between the variance of stock returns and financial leverage is positive when corporate and personal taxes are also considered, and (3) with regard to the relationship between the variance of stock returns and financial leverage, using market measures of the latter tends to generate a higher coefficient of determination and a more accurate approximation of the theoretical relationship between financial leverage and the variance of stock returns. View Full-Text
Keywords: volatility; financial leverage; market imperfections; corporate taxes; personal taxes volatility; financial leverage; market imperfections; corporate taxes; personal taxes
MDPI and ACS Style

Aharon, D.Y.; Yagil, Y. The Impact of Financial Leverage on the Variance of Stock Returns. Int. J. Financial Stud. 2019, 7, 14.

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