Abstract

This paper examines the effect of leverages and market size on stock returns of Malaysian public listed companies. This study attempts to investigate the impact and relationship of financial leverages and market size on stock returns. A random sample of top 19 Malaysian companies based on market capitalisation been selected covering a period from 2010 to 2017. This study focused on stock returns as dependent variable with three independent variables which are debt-to-equity ratio, debt ratio and market size. The methods used included random and fixed effect estimators as well as correlation analysis. The most appropriate model that has been adopted is Random Effect Model. The finding shows that only market size resulted in significant inverse relationship with stock returns, in the other hand, the debt-to-equity and debt ratio show no relationship with stock returns. As for the investors, although the stock market is mainly influenced by economic effects and announcements, the investors can now consider the market size as a factor that will affect the stock returns.

Highlights

  • In stock market, the investors invest their money and expect to earn income from the investment

  • This study aims to achieve the following objectives: 1. To investigate the significant relationship between financial leverages and market size and stock returns of selected stocks listed on Bursa Malaysia

  • Since there is a negative impact between market size and stock returns, by 1% decrease in market size will increase the stock returns by 3.37%

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Summary

Introduction

The investors invest their money and expect to earn income from the investment. This income is named as ‘stock returns’ which may be defined as benefits earned from trading of shares or the dividends received from the investment. Stock returns are one of the factor for the investors to make investment in either buying or selling the stocks. One of the factors is financial leverage which arises from the difference between a company's return on investment in its own assets and the rate at which the company must pay its creditors (Oketch et al, 2018). Financial leverage refers to the impact of changes in the degree to which a company's assets are financed from borrowed funds on returns. Financial leverage reflects the debt amount used in the capital structure of the firm

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