Does debt make you rich? - An empirical study of the effect leverage has on stock-returns

Debt is commonly used by firms as a way of financing. Factors driving stock return have been the subject of numerous studies. Investors are constantly seeking ways to better understand stock return, which is where financial statements may provide them with relevant information. The presented research paper focuses on explaining whether there is a significant relationship between stock return and leverage (as well as its components). Furthermore, the authors investigated whether changes in tax and the tax shield deriving from interest bearing debt can significantly affect the stock return. The panel dataset contains quarterly observations between 2000-2015 of the non-financial firms listed on Nasdaq OMX Stockholm’s mid-cap list. By studying a different market than the commonly researched U.S. market and highlighting the interest-bearing portion of the debt carried by firms, the authors shed new light on the topic of leverage. By integrating a number of factors of interest into one study (instead of, as commonly done, studying one factor) the authors provide a different approach to the study of leverage in the context of the Miller and Modigliani’s framework, thus providing new insights. The authors have statistically shown that an increase in leverage has a negative impact on the stock return. The findings furthermore showed correlation between the stock return and the debt parameters, as well as the presence of abnormal returns during tax rate decrease