The Effect of Financial Leverage and Market Size on Stock Returns on the Ghana Stock Exchange: Evidence from Selected Stocks in the Manufacturing Sector

Abstract

In this paper we investigate the effect of financial leverage and market size of selected stocks on stock returns. Ordinary Least Square (OLS) regression methods were used to model the relationship between the dependent variable and the independent variables. The leverage of the selected firms were estimated from the annual financial reports covering a period of five years (i.e.2006-2010) of selected five corporations operating in the manufacturing sector. Furthermore, average monthly stock prices of the selected stocks between 2006-2010 for Unilever, Pioneer Kitchenware, PZ Cussions, Aluworks and Camelot making up the five selected companies were used. The study established a negative and significant relationship between leverage and stock return when the overall industrial data is used. However at the individual firm level the relationship was not stable. Four out of the five selected companies (i.e. PZ, Unilever, Aluworks and Camelot) all had associated leverage coefficients to be negative. Pioneer Kitchenware however, had positive leverage coefficient. The study also found the relationship between Size and stock returns to be positive and significant. The size effect within the manufacturing sector was however very limited.