Can Leverage Level Explain Value Premium

Abstract

According to the traditional MM theory, in the case of taxation, the level of leverage of a company will affect its market value. This article conducts an empirical study on the reasons for the existence of the value premium in China's A-share market. It is believed that different levels of leverage of enterprises will have an impact on the value of enterprises in China's A-share market, thereby affecting their profitability. After constructing a Fama three factor capital asset pricing model and confirming that there is indeed a value premium in the Chinese stock market, this paper incorporates the financial leverage, operational leverage, and comprehensive leverage of enterprises in the A-share market into the Fama three factor capital asset pricing model, and uses the OLS regression method for enterprises in the Chinese A-share market. The empirical results show that the value premium reflects the compensation for taking more risks and is related to financial leverage, operational leverage, and comprehensive leverage.