Leveraged Small Value Equities

Verdad

Brian Chingono, Daniel Rasmussen

Research

28 Pages

This paper examines whether leverage can enhance returns within small value equity investing and explores why some leveraged companies outperform others. The authors argue leverage and value interact positively, with a ranking system producing a 25.1% average annual return, challenging traditional skepticism toward corporate debt.

Key Takeaways

Leverage Value Interaction: Portfolios emphasizing leverage within small value stocks generated a 25.1% average annual return from 1965 to 2013.
Strong Risk Adjusted Returns: The strategy delivered a 9.6% CAPM alpha and 13.1% annual excess return after controlling for multiple factor exposures.
Focused Stock Selection: The top ranked portfolio held just 25 stocks and achieved a Sharpe ratio of 0.51 with 39.4% volatility.
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