The Industry Effect on the Relationship Between Leverage and Returns

This paper aims to investigate the impact of leverage on stock returns. The analysis is performed both on a full sample basis and on an industry basis. Industry class is generally considered as an important risk factor. The sample used consisted of Italian listed non financial companies over the period 2000/12–2010/3. The main contribution of our work is that we enhance the capital structure studies by broadening the limited work that has been accomplished on the base of leverage as an explanatory variable of returns, in a totally different environment, that of a county of the South European region. The empirical findings, on the full sample, show that the leverage risk factor presents a strong — positive and statistically significant relationship with stock returns at the medium and high levered deciles. At the industry level analysis the leverage factor has a positive relation with excess returns for most industries. Overall, leverage in Italy is a priced risk factor. Copyright Eurasia Business and Economics Society 2011