The purpose of our study is to examine the ability of the debt ratio to predict Hong Kong stock market stock returns in long run. Our test period is from Jan 1, 1999 to May 1, 2008. Sixty companies in the Hang Seng Composite Index were included in our samples for the research. We found Leverage ratios could not have been used to predict cumulative abnormal returns or buy-and-hold abnormal returns in our test period. The correlation between Leverage ratios and abnormal returns is not significant. We also found other commonly used ratios, such as price-to-earnings ratio, price-to-book ratio and market value are better indicators of abnormal returns than Leverage ratios
