The Effects of Leverage on Stock Returns

Abstract: This paper investigates the relationship between capital structure and stock returns for Swedish firms listed on the Nasdaq OMX Stockholm Stock Exchange. Actual stock returns and leverage figures in form of total, long-term and short-term debt are used in the calculations. The results suggest, in contrast with a majority of fundamental theories, that there is a negative relationship between leverage and stock returns. The results indicate that investors are not being compensated for the extra risk they are taking on when investing with high-leveraged firms. Several previous empirical studies has come to the same conclusion. This study in conjunction with other earlier empirical studies question a very common understanding of capital structure.