The Effect of Financial Leverage & Systematic Risk on Stock Returns in the Amman Stock Exchange (Analytical Study – Industrial Sector)

Abstract

This study aims at evaluating the relationship between stock returns in industrial companies listed on Amman Stock Exchange (ASE) and each of the systematic risk and financial leverage. Stock returns (R_it) are measured through the equation of returns divided by acquisition period. Whereas, systematic risk is measured by beta coefficient (?) using the market model, while the financial leverage (Lev) is expressed by debt ratio. Data concerning the variables of the study were collected comprising 48 industrial companies listed in Amman Stock Exchange for the period between January 2000 and December 2009. This task was accomplished in order to determine the relationship between stock returns as a dependent variable, and each of the systematic risk & financial leverage as independent variables. It should be noted that the study shows a statistically significant relationship between dependent variable and independent variables, it also found that these independent variables explain the 4.4% percentage of variation in stock returns in the industrial companies listed in Amman Stock Exchange.

The results revealed by the study model were contradictory, and do not match very well with the previous studies that have been conducted on more developed stock markets. Moreover, the direction of some independent variables and it relationship with the dependent variable were different from the hypothetical relationship, given the example of the relationship between systematic risk represented by beta coefficient and stock returns. However, these results correspond very well with studies conducted on developing markets.

Keywords: Returns, Systematic Risk, Financial Leverage, Amman Stock Exchange, Industrial Sector.