Impact of Leverage on Stock Return (A case study of textile sector of Pakistan Stock Exchange)

Abstract

This research paper scrutinizes the relation between Leverage and Stock returns for Pakistani non-financial sector, textile companies listed on the PSX (Pakistan Stock Exchange) from year 2013 to 2018. For this purpose, the research uses stock returns as dependent variable and total debt and interest coverage ratios as a proxy for leverage which is an independent variable. The results suggested that there is a negative relationship between debt to equity ratio and stock returns and a positive relationship between interest coverage ratio and stock return. The results reveals that investors are not paid as much as the extent of their high risk taking with high leveraged firms. Previous numerous empirical studies have also come to the same assumption. This study is in line with those prior experimental studies which gives a common understanding of firms’ Leverage.