Leverage and Stock Performance: An Empirical Study of Leverage Ratio and Stock Returns in the Norwegian Market
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The purpose of this thesis is to investigate whether capital structure has an effect on stockreturns, and if existing theories can explain a potential relationship. We gather data forfirms listed on the Oslo Stock Exchange in the period 1990 - 2020. This includes 2910observations distributed among 331 unique firms. There are different theories regarding the topic, and previous empirical research hasyielded contradictory results. Previous research about capital structure in the context ofthe Norwegian market is scarce, making it especially interesting to study. This thesis explores the relationship between debt ratio and expected stock returns usinga Fama-Macbeth two-step regression and a fixed-effects model. We include several controlvariables, which prior studies have found to affect stock returns. We find a statisticallynegative relationship between expected stock returns and the leverage level. According to our results, investors are not being rewarded for the extra risk associatedwith debt financing, and the average firm does not optimize their capital structure if thegoal is to maximize the share price.