Leverage and Stock Performance: An Empirical Study of Leverage Ratio and Stock Returns in the Norwegian Market

The purpose of this thesis is to investigate whether capital structure has an effect on stock returns, and if existing theories can explain a potential relationship. We gather data for firms listed on the Oslo Stock Exchange in the period 1990 - 2020. This includes 2910 observations distributed among 331 unique firms. There are different theories regarding the topic, and previous empirical research has yielded contradictory results. Previous research about capital structure in the context of the Norwegian market is scarce, making it especially interesting to study. This thesis explores the relationship between debt ratio and expected stock returns using a Fama-Macbeth two-step regression and a fixed-effects model. We include several control variables, which prior studies have found to affect stock returns. We find a statistically negative relationship between expected stock returns and the leverage level. According to our results, investors are not being rewarded for the extra risk associated with debt financing, and the average firm does not optimize their capital structure if the goal is to maximize the share price