Leverage versus volatility: evidence from the capital structure of European firms
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The impact of leverage on financial market stability and the relationship with the real economy is a key concern among researchers. This paper makes an initial attempt to investigate the relationship between a firm's leverage, return and share price volatility from an Islamic finance perspective and capital structure theory. A multicountry dynamic panel framework and the mean-variance efficient frontier are applied to 320 sample firms from eight European countries, divided into portfolios of low and high debt using the shari'ah screening threshold of 33%. We find that the firm's return and volatility change with changes in the capital structure. Islamic compliant stocks show, in most cases, less volatility than non-compliant stocks but are no different in terms of return. Finally, our results tend to imply a case for limiting debt beyond certain levels.
Volatility , Leverage , Islamic stocks , Mean-variance efficient frontier , Dynamic GMM , Wavelet time-frequency coherence analysis
El Alaoui, A. O., Bacha, O. I., Mohammed Masih, A. M., & Asutay, M. (2017). Leverage versus volatility: evidence from the capital structure of European firms. Economic Modelling, 62, 145-160. https://doi.org/10.1016/j.econmod.2016.11.023