Financial leverage and stock return comovement

Leverage-initiating stocks experience an increase in return comovement with leveraged stocks and a decrease in return comovement with zero-leverage stocks in the year after the leverage initiation event. Conversely, stocks that fully deleverage comove more with their new peers of zero-leverage stock...

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Bibliographic Details
Published in:Journal of financial markets (Amsterdam, Netherlands) Netherlands), 2022-09, Vol.60, p.100699, Article 100699
Main Authors: Do, Hung X., Nguyen, Nhut H., Nguyen, Quan M.P.
Format: Article
Language:English
Subjects:
Clientele
Comovement
Leverage
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Summary:Leverage-initiating stocks experience an increase in return comovement with leveraged stocks and a decrease in return comovement with zero-leverage stocks in the year after the leverage initiation event. Conversely, stocks that fully deleverage comove more with their new peers of zero-leverage stocks and less with their old peers of leveraged stocks. These findings are robust after controlling for common factors and firm characteristics and using various time series and events as exogenous shocks to corporate leverage decisions. Our findings can be explained by investor clienteles for financial leverage and are not driven by omitted variables and other characteristic-induced comovements. •We investigate financial leverage as a style investing.•Leverage initiators comove more (less) with leveraged (zero-leverage) stocks.•Deleveraged initiators comove more (less) with zero-leverage (leveraged) stocks.•Shifts in return comovement are greater for larger absolute leverage changes.•Mutual funds adjust their holdings of leverage changing stocks around the event year.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2021.100699