The value premium : an empirical analysis of the financial leverage hypothesis

The value premium has a solid academic background since decades. While its existence is well documented, the explanations are still controversial among behaviorists and supporters of efficient markets. This thesis examines the predictive power of book-to-market ratio in the context of the financial leverage hypothesis. Building on Modigliani and Miller (1958), the assumption of riskier equity for leveraged firms is tested empirically by proxying for book and market leverage. Following Fama and French (1992), the research is extended by analyzing the impact of size and beta on the cross-section of equity returns. The results provide support for the risk-based explanation in the framework of financial leverage. The book-to-market ratio partially absorbs market leverage, suggesting that a major part of the value premium results from a leverage effect.submitted by Luca La PlacaUniversity of Innsbruck, Masterarbeit, 2018(VLID)280016