Effect of leverage on stock returns: evidence from Nairobi Securities Exchange
The assets of a company can be financed either by increasing the owner claims or creditors claims. The owners claim is increased by raising funds through issuing ordinary shares or by retaining earnings. The creditors claims on the other hand increase through borrowing. The financing or the Capital Structure of a Company influences the shareholders' return and also risk. Financial Leverage, that is, the use of fixed-charges sources of funds such as debt and preference shares, has particular implications on shareholders return. The primary objective of a Company in using leverage is to magnify shareholders return under favourable economic conditions. This is based on the assumption that the borrowed funds can be obtained at a cost lower than ROL Thus, when the favourable variance (surplus) is distributed to the shareholders, the EPS or ROE increases. This paper therefore seeks to show the effect of Leverage on Stock Returns using companies listed on the Nairobi Securities Exchange.