Leverage versus volatility: Evidence from the capital structure of European firms

El Alaoui, A.O.; Ismath Bacha, O.; Masiha, M.; Asutay, M.

Abstract

The impact of leverage on financial market stability and the relationship with the real economy is a key concern among researchers. This paper makes an initial attempt to investigate the relationship between a firm’s leverage, return and share price volatility from an Islamic finance perspective and capital structure theory. A multi-country dynamic panel framework and the mean-variance efficient frontier are applied to 320 sample firms from eight European countries, divided into portfolios of low and high debt using the shari’ah screening threshold of 33%. We find that the firm’s return and volatility change with changes in the capital structure. Islamic-compliant stocks show, in most cases, less volatility than non-compliant stocks but are no different in terms of return. Finally, our results tend to imply a case for limiting debt beyond certain levels.

Citation

El Alaoui, A., Ismath Bacha, O., Masiha, M., & Asutay, M. (2017). Leverage versus volatility: Evidence from the capital structure of European firms. Economic Modelling, 62, 145-160. https://doi.org/10.1016/j.econmod.2016.11.023

• Journal Article Type: Article
• Acceptance Date: Nov 28, 2016
• Online Publication Date: Jan 11, 2017
• Publication Date: Jan 11, 2017
• Deposit Date: Jan 19, 2017
• Publicly Available Date: Jan 11, 2018
• Journal: Ecological Modelling
• Print ISSN: 0264-9993
• Electronic ISSN: 1873-6122
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 62
• Pages: 145-160
• DOI: https://doi.org/10.1016/j.econmod.2016.11.023
• Public URL: https://durham-repository.worktribe.com/output/1396016