Does Leverage Always Mean Risk? Evidence from ASE

Zeyad S. Ramadan

Abstract


The aim of this study is to explore whether leverage always means risk. For this purpose, unbalanced pooled cross-sectional data regression of a sample of 30 Jordanian industrial firms listed in ASE in the years 2001-2011, and Beta coefficient (?) as proxy for the systematic risk were utilized. Furthermore, four different definitions of the leverage have been tested to guarantee the credibility and generality of the results. Result show that leverage is a definite factor in estimating risk, and can explain 21%-24% of the variability in the systematic risk for the Jordanian industrial firms. Accordingly, the leverage from the Jordanian industrial firm’s point of view always means risk, with the need to remember that risk is not necessarily a bad thing, since high profit potential often comes with high level of risk.

This result is consistent with the traditional theory of capital structure, where greater level of debt in the capital structure comes along with greater risk.


Full Text: PDF DOI: 10.5539/ijef.v4n12p150

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This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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