Author : Valentin Dimitrov
Publisher :
ISBN 13 :
Total Pages : 41 pages
Book Rating : 4.:/5 (129 download)
Book Synopsis The Value Relevance of Changes in Financial Leverage by : Valentin Dimitrov
Download or read book The Value Relevance of Changes in Financial Leverage written by Valentin Dimitrov and published by . This book was released on 2012 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Economic performance (economic profits, economic income, or underlying operating performance) of a firm is not observable. Market participants use accounting earnings and other proxies to measure the otherwise unobservable economic performance. Ball and Brown (1968) show that accounting earnings capture the economic performance to some extent. In particular, they find that accounting earnings are correlated with stock returns (value relevant). We hypothesize and show that changes in financial leverage are also value relevant. We document a significantly negative association between changes in financial leverage and contemporaneous risk-adjusted stock returns. The information in changes in financial leverage is incremental to the information in earnings-based measures. Furthermore, we find that changes in financial leverage are also negatively associated with future risk-adjusted returns. This evidence suggests that the information in changes in financial leverage is not impounded in stock prices in a timely fashion.