On Black’s Leverage Effect in Firms with No Leverage
Name
On-Blacks-Leverage-Effect-in-Firms-with-No-Leverage.pdf
Description
Submitted version
Size
457.9 KB
Format
Adobe PDF
Checksum (MD5)
322ce2cd24a096040ea5b9394a877ec6
Author(s)
Hasanhodzic, Jasmina
Lo, Andrew W
Date Issued
October 2019
Journal
Journal of Portfolio Management
Publisher
Pageant Media US
Citation
Hasanhodzic, Jasmina and Andrew W. Lo. "On Black’s Leverage Effect in Firms with No Leverage." Journal of Portfolio Management 46, 1 (October 2019): 106-122. © 2019 Pageant Media Ltd
Version
Original manuscript
Abstract
One of the most enduring empirical regularities in equity markets is the inverse relationship between stock prices and volatility. Also known as the leverage effect, this relationship was first documented by Black, who attributed it to the effects of financial or operating leverage. This article documents that firms that had no debt (and thus no financial leverage) from January 1973 to December 2017 exhibit Black’s leverage effect. Moreover, the authors find that the leverage effect of firms in this sample is not driven by operating leverage. On the contrary, in this sample the leverage effect is stronger for firms with low operating leverage as compared to those with high operating leverage. Interestingly, the firms with no debt from the lowest quintile of operating leverage exhibit a leverage effect that is on par with or stronger than that of debt-financed firms.
MIT Department
Sloan School of Management
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.3905/jpm.2019.46.1.106
