A Behavioural Finance Explanation of a Gearing-ß Inverse Association Referencing Weill’s Liquidity Result (in English)

Abstract

The authors investigated Arnold’s conjecture that Leverage (Financial Gearing) and Operating Gearing should be positively related to the equity ß of the Sharpe/Lintner CAPM. They find for a sample of the S&P 500 firms that have been on that index continuously for more than 15 years, that ß is negatively associated with Leverage and Operating Gearing. Using Weill’s results for transitional economies, the authors suggest that liquidity may provide an explanation for this anomalous ß-Gearing inversion. The implications are: that (1) one should revaluate the positive associations posited for Financial and Operating gearing with ß and (2) consider the possibility of managing liquidity as a way to affect ß.financial gearing; leverage; liquidity; beta