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Leverage versus volatility : evidence from the capital structure of European firms.

El Alaoui, A.O. and Ismath Bacha, O. and Masiha, M. and Asutay, M. (2017) 'Leverage versus volatility : evidence from the capital structure of European firms.', Economic modelling., 62 . pp. 145-160.


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.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Publisher statement:© 2017 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:28 November 2016
Date deposited:20 January 2017
Date of first online publication:11 January 2017
Date first made open access:11 January 2018

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