Low Versus High Leverage (LVH)

Disputes whether financial structure can create value or not were started more than 50 years ago with Modigliani Miller theorem. In this paper I would like to present my own view on level of debt in value creation process. What I am going to prove is that due to expansion option companies with low level of debt are outperforming highly leveraged companies in the long run. I have created a new factor LVH (low versus high leverage) to quantitatively prove that being long in companies with below median net debt/EBITDA and being short in companies with above net debt/EBITDA can bring abnormal returns (with Sharpe ratio even higher than 0.9 and statistically significant alfa of around 7.7% yearly). As shown in chapter IV.II. such strategy might be supplemented by Momentum, Betting against Beta or High minus Low Devil strategies.