Impact of Leverage, Solvency and Size Effect on Mexican Capital Market Firms Returns

Abstract

The objective is to analyze the impact of leverage (short- and long-term debt), capital structure, solvency, Returns on Assets (ROA), and firm size on the stock returns of 52 firms quoted in Mexican stock market (BMV) for the period 2011(1Q)-2021(2Q). Methodology includes three panel approaches are implemented: Pooled Ordinary Least Square (POLS), Fixed-Effect Model (FEM) and Random Effect Model (REM). Findings suggest a statistically significant negative effect of firm size stock returns, whereas there is a statistically significant and positive impact of ROA and solvency on stock returns. We recommend that, investors should pay attention, not only, to company size and profitability-related indicators, but also to indebtedness, to prices reflect the risk associated with the assets. The originality lies in the fact that the issue of capital structure and its impact on the market value of Mexican companies has been scarcely studied, and an extensive sample of companies is used, and various panel data methodologies are also used to compare the results. We conclude that, the size and profitability indicators have a significant effect on the stock returns, but the leverage does not.