Do Investors Still Acknowledge Excessive Corporate Leverage? Understanding Divergence of Valuation During the Age of ZIRP and QE

Abstract

Times of financial crisis generate often irregular monetary policy response. In the past decade, much focus has surrounded zero, and even, negative interest rate policies along with quantitative easing. While corporate borrowing continues to be ‘cheap,’ it is important to analyse as to whether investors have distinctly, and geographically, attributed differential valuations surrounding the use of corporate leverage? Differentiating corporate entities across six of the largest international exchanges, this research focuses on the performance of companies based on time-varying debt/equity performance, with particular emphasis on the implementation of quantitative easing. Results indicate that the average returns of the highly-leveraged firms significantly diverge during both interest rate and quantitative easing events, however, variation is found to be dependent on both the geographical distribution and concentration of leverage in the form of both debt and equity. After a thorough investigation, the results strongly suggest that positive returns are achieved by highly leveraged firms following asset purchasing programmes.