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

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

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Authors

A.O. El Alaoui

O. Ismath Bacha

M. Masiha



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.

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
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

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