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LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
PJAEE, 18 (13) (2021)
LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
Abrar Alshehri1, Shabir Hakim2
College of Business, Effat University, Qasr Khuzam St., Kilo. 2, Old Mecca Road. P.O.BOX
34689, Jeddah 21478, Saudi Arabia. [email protected]
College of Business, Effat University, Qasr Khuzam St., Kilo. 2, Old Mecca Road. P.O.BOX
34689, Jeddah 21478, Saudi Arabia. [email protected]
Abrar Alshehri, Shabir Hakim. Leverage Impact on Stock Returns in Saudi Arabia-Palarch’s Journal Of Archaeology Of Egypt/Egyptology 18 (13), 881-888. ISSN 1567214x
Keywords: Leverage, Stock Returns, Size, Value, Market Portfolio, Saudi Arabia
ABSTRACT
The study aimed to investigate impact of market portfolio, stock returns size, value and
leverage toward stock returns in Saudi Arabia between January 2010 and December 2015.
The result showed that leverage had impact on two company’s stock returns, size on one
company and firm’s value on three companies while market portfolio was main determinant
of Saudi stock return variation. This study was used secondary data obtained from Bloomberg
database. This study had applied regression analysis for model test using last six years (20102015) monthly data. In additions, this study used t-test and test significant of impact of
independent variable on dependent variable test statistic (T-statistic) was used. The result
suggested that explanatory power of four factor model used in this study varied from 17.94%
to 69.72%.
INTRODUCTION
The stock returns in the stock market reflect a company performance
comparing to other companies in the market [1]. Leverage is an important risk
factor that has a significant impact on the stock returns. An Increase in the
leverage leads to an increase in the cost of capital. Therefore, the value of a
firm will be affected due to higher financial and bankruptcy risk. As a result,
the required rate of return will be affected.
The stock returns used market risk (CAPM). Meanwhile, Fama et al. [2] added
size and book-to market factors. In this study, leverage will be a risk factor on
the stock returns.
881
LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
PJAEE, 18 (13) (2021)
There were several previous studies had examined the relationship between
leverage and stock return in respect to other factors. Modigliani et al. [3],
Hamada [4], Bhandari [5], Westerfield et al. [6] and Bhayani [7] found
positive relationship between leverage and stock return to other factors [3-7].
In contrast, Penman et al. [8] and Acheamapong et al. [9] showed leverage
was related negatively to the stock returns.
The Saudi stock market was established formally in 1984 and still very young
market comparing to other stock market. Meanwhile, Saudi stock market was
one of main emerging market in the Arab region. It’s important to understand
the factor that determines stock return of companies that exist in Saudi market.
The study was aimed to determine leverage, size, value and market portfolio
impact on stock returns in Saudi Arabia.
METHODOLOGY
This study was used secondary data obtained from Bloomberg database. The
data of the 1 firms’ size, book to market, leverage and Saudi stock market
returns were obtained from Bloomberg Professional Database. Each company
had different data set between year 2010 and 2015 monthly data. Risk-free
rate obtained from FRED database (The Federal Reserve St. Louis).
SASEIDX index (Tadawul All-Share TASI Index) used as proxy for Saudi
Arabia stock market. This study had applied regression analysis for model test
using last six years (2010-2015) monthly data. Regression analysis used to
estimate the relationship between two variables x and y to estimate actual
outcomes and check whether model fit or not. Y=F(X) described the
relationship and variation of X or more independent variables (predictor) on Y
dependent variable (response).
In additions, this study used t-test and test significant of impact of independent
variable on dependent variable test statistic (T-statistic) was used. Test statistic
compared parameter value stated by null hypothesis with an estimate of
parameter from sample data.
RESULT AND DISCUSSION
Result
Table 1 tabulates the Descriptive Statistic of the selected companies. The
value of mean, standard error, median, standard deviation, sample variance,
kurtosis, and Skewness for each company were executed.
Table 1: Descriptive Statistic
Company name
Mean
Std.
Error
29.88
63.41
Median
Std. D.
Sample
variance
46420.52
128675.70
Al Jouf
1180.04
1190.10 215.45
Al Qassim
680.55
496.25 358.71
Agricu
Alabdullatif Inv 2780.15 66.14 2644.69 561.18
314917.61
Almarai Co
32327.62 1333.20 27147.96 11312.60 127974845.6
Alsorayai Group 752.97 12.75 749.25 106.67
11377.81
Kurtosis Skewness
-0.35
0.40
-0.001
1.36
-1.27
-0.97
0.44
0.27
0.72
0.33
882
LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
Company name
Mean
PJAEE, 18 (13) (2021)
Std.
Error
16.49
Median
Std. D.
Sample
variance
19587.18
Kurtosis Skewness
Anaam
625.45
624.55 139.95
Internatio
Ash274.72
4.92
267.75
20.29
411.52
Sharqiyahde
Halwani Bros 1793.85 69.39 1764.29 500.40
250399.06
Co
Jazan
865.41 22.60 819.50 191.80
36787.09
Developmen
National Agricul 1968.14 58.94 1785.00 500.13
250127.81
Red Sea
1871.16 86.80 1597.50 736.55
542502.13
Housing
Saudi Fisheries 1433.13 511.62 1527.69 437.97
191817.25
Saudi Paper
1326.44 36.13 1265.63 306.56
93981.86
Manu
Savola
24708.26 1205.09 20175.00 10225.52 104561164.87
Tabuk
627.21 18.29 649.25 155.20
24087.61
Agricultur
Wafrah For
791.48 54.19 780.80 236.22
55800.55
Indus
-1.07
-0.14
-0.41
0.78
-1.39
-0.02
1.55
1.21
-0.08
0.96
1.01
1.39
-0.89
1.13
0.16
0.71
-0.98
-0.81
0.63
-0.27
-0.77
0.52
ASH-SHARQIYAH DE Company had lowest mean value of 274.72 and
ALMARAI had highest mean of 32327.62. Meanwhile, ASH-SHARIYAH De
had lowest standard deviation of 20.29 and ALMARAI had highest standard
deviation of 11312.60. ASH-SHARQIYAH DE had lowest variance value of
411.52 and ALMARAI had highest variance of 127974845.60.
TABUK AGRICULTUR had lowest skewness of -0.27 and REA SEA
HOUSING had highest skewness of 1.39. In additions, 4 out of 16 companies
had negative skewness and 12 companies had positive skewness. According to
Kurtosis values, normal curve was lower than standard normal curve.
Moreover, Table 2 demonstrates the descriptive statistic of market portfolio.
Table 2: Descriptive statistic of market portfolio
Rm-Rf
Mean
Standard error
Median
Standard deviation
Sample variance
Kurtosis
Skewness
Range
Minimum
Maximum
0.55
0.64
1.62
5.42
29.33
1.16
-0.56
30.11
-17.00
13.11
883
LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
PJAEE, 18 (13) (2021)
The mean was 0.55, standard deviation was 5.42 and variance of 29.33. The
skewness had value of -0.56 which indicated normal curve was lower than
standard normal curve. Next, Table 3 demonstrates the descriptive statistic of
the leverage.
Table 3: Descriptive statistic of the leverage
Company name
Mean
Al Jouf
4.49
Al Qassim Agricu 0.82
Alabdullatif Inv 20.99
Almarai Co
42.39
Alsorayai Group 38.02
Anaam Internatio 11.28
Ash-Sharqiyahde 4.08
Halwani Bros Co 10.78
Jazan Developmen 4.59
National Agricul 43.63
Red Sea Housing 19.50
Saudi Fisheries 18.89
Saudi Paper Manu 52.72
Savola
32.73
Tabuk Agricultur 3.90
Wafrah For Indus 7.96
Std. Median Std. D.
Error
0.21
5.06
1.50
0.27
0.37
1.50
0.81 23.08
6.87
0.34 42.33
2.90
0.36 37.06
2.97
0.60
8.29
5.11
0.66
4.02
2.73
1.00
7.96
7.23
0.13
4.68
1.13
0.50 42.96
4.23
0.55 19.02
4.63
0.65 17.97
5.54
0.48 54.49
4.08
0.36 32.79
3.09
0.25
4.35
2.12
0.58
6.91
2.52
Sample Kurtosis Skewness
variance
2.26
0.07
-1.00
2.25
6.91
2.90
47.18
-0.29
-0.66
8.38
-0.11
0.50
8.85
-0.21
0.84
26.15
-1.01
0.77
7.43
-1.78
-0.33
52.33
-0.67
0.71
1.28
-0.88
-0.55
17.92
-1.19
0.10
21.48
-0.75
-0.20
30.64
0.42
0.29
16.64
-0.72
-0.70
9.52
-1.02
0.46
4.50
-0.69
-0.19
6.35
-1.36
0.32
AL QASSIM AGRICU had lowest mean of 0.82 and SAUDI PAPER MANU
had highest mean of 52.72. AL-QASSIM AGRICU had lowest standard
deviation of 1.50 and HALWANI BROS CO had highest standard deviation of
7.23. JAZAN DEVELOPME had lowest variance of 1.28 and HALWANI
BROS CO had highest variant of 52.33. AL JOUF had lowest skewness of 1.00 and AL QASSIM AGRICU had high skewness of 2.90. Meanwhile, 7
companies had negative skewness and 9 companies had positive skewness. AL
QASSIM AGRICU had skewness of 6.91 which the peak was higher than
standard normal curve. In addition, Table 4: tabulates the descriptive statistic
of the value.
Table 4: Descriptive statistic of the value
Company name
Mean
Al Jouf
Al Qassim Agricu
Alabdullatif Inv
Almarai Co
Alsorayai Group
Anaam Internatio
Ash-Sharqiyahde
Halwani Bros Co
0.59
0.68
0.47
0.27
0.62
0.26
0.30
0.34
Std.
Error
0.01
0.04
0.01
0.00
0.01
0.01
0.01
0.01
Median Std. D.
0.57
0.77
0.48
0.27
0.64
0.27
0.31
0.32
0.08
0.24
0.07
0.03
0.09
0.07
0.02
0.09
Sample Kurtosis Skewness
variance
0.007
1.16
0.83
0.059
-1.00
-0.75
0.005
-1.22
-0.03
0.001
-1.05
-0.03
0.008
0.64
0.09
0.005
0.97
0.74
0.001
-1.09
-0.59
0.008
-0.73
0.66
884
LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
Company name
Mean
Jazan Developmen
National Agricul
Red Sea Housing
Saudi Fisheries
Saudi Paper Manu
Savola
Tabuk Agricultur
Wafrah For Indus
0.71
0.58
0.48
0.17
0.51
0.45
0.68
0.28
PJAEE, 18 (13) (2021)
Std.
Error
0.02
0.01
0.01
0.01
0.01
0.01
0.02
0.02
Median Std. D.
0.70
0.59
0.47
0.17
0.51
0.48
0.63
0.27
0.16
0.09
0.12
0.05
0.13
0.13
0.20
0.07
Sample Kurtosis Skewness
variance
0.027
-0.27
0.10
0.008
-0.43
-0.59
0.015
-0.74
-0.19
0.003
-0.56
-0.11
0.016
1.04
0.65
0.016
-1.25
-0.02
0.041
-0.82
0.58
0.005
-1.07
0.41
SAUDI FISHERIES had lowest mean of 0.17 and JAZAN DEVELOPME had
highest mean of 0.71.ASH-SHARQIYAH De had lowest standard deviation of
0.02 and TABUK AGRICULTU had highest standard deviation of 0.20. ASHSHARQIYAH DE had lowest variance of 0.001 and AL QASSIM AGRICU
had highest variance of 0.059. RED SEA HOUSING had lowest skewness of 0.19 and AL JOUF had highest skewness of 0.83. There were 8 companies had
negative skewness and 8 companies had positive skewness. All companies had
Kurtosis less than 3, normal curve was lower than standard normal curve.
Besides that, Table 5 demonstrates the descriptive statistic of the stock return.
Table 5: Descriptive statistic of the stock return
Company name
Mean
Std. Median Std. D. Sample Kurtosis Skewness
Error
variance
Al Jouf
1.14 1.07
0.32
7.74
59.96
1.42
-0.002
Al Qassim Agricu 3.48 3.15
-0.38 17.80 316.95
8.24
2.38
Alabdullatif Inv 0.36 0.82
0.79
6.92
47.93
0.40
-0.54
Almarai Co
1.46 0.63
1.94
5.39
29.02
0.80
0.17
Alsorayai Group -0.19 1.15
-0.71
9.61
92.29
1.47
0.55
Anaam Internatio -0.16 1.47
-1.32 12.48 155.63
5.31
1.01
Ash-Sharqiyahde 0.86 1.35
1.43
5.59
31.21
-0.28
0.20
Halwani Bros Co 2.06 1.45
2.09
10.47 109.62
1.78
0.79
Jazan
0.80 1.25
1.70
10.63 113.05
0.62
0.31
Developmen
National Agricul 0.59 0.92
-0.69
7.82
61.19
0.02
0.32
Red Sea Housing 0.32 1.19
-0.22 10.06 101.21
0.29
-0.23
Saudi Fisheries -0.01 1.57
-0.63 13.36 178.57 14.01
2.56
Saudi Paper Manu -0.15 1.39
-1.23 11.76 138.35
2.20
0.94
Savola
1.17 0.85
1.52
7.22
52.19
0.09
-0.05
Tabuk Agricultur 0.22 1.36
0.77
11.56 133.69
6.94
1.21
Wafrah For Indus -4.51 2.65
-4.66 11.56 133.65
0.30
0.16
WAFRAH FOR INDUS had lowest mean value of -4.51 and AL QASSIM
AGRIC had highest mean of 3.48. There were 5 companies had negative mean
and 11 companies had positive value. ALMARAI had lowest standard
deviation of 5.39 and AL QASSIM AGRICU had highest standard deviation
of 17.80. ALMARAI had lowest variance of 29.02 and AL QASSIM
AGRICU had highest variance of 316.95. ALABDULLATIF INV had lowest
885
LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
PJAEE, 18 (13) (2021)
skewness of -0.54 and SAUDI FISHERIES had highest skewness of 2.56,
Meanwhile, 4 companies had negative skewness and 12 companies had
positive skewness.
In additions, SAUDI FISHERIES had Kurtosis of 14.01, TABUK
AGRICULTUR had 6.939, ANAAM INTERNATIONAL had Kurtosis value
of 5.31 and AL QASSIM AGRICU had Kurtosis of 8.24. The peal of normal
curve was higher than standard normal curve. Furthermore, Table 6 tabulates
the regression estimation of leverage and market portfolio for all companies.
Table 6: Regression estimation of leverage and market portfolio for all
companies
Company name
Al Jouf
Al Qassim Agricu
Alabdullatif Inv
Almarai Co
Alsorayai Group
Anaam Internatio
Ash-Sharqiyahde
Halwani Bros Co
Jazan Developmen
National Agricul
Red Sea Housing
Saudi Fisheries
Saudi Paper Manu
Savola
Tabuk Agricultur
Wafrah For Indus
Leverage
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef.
t-test
Market
Size
Value
portfolio
-0.8406
0.6642
-0.0065
-36.1607
-1.2510
(4.0572) *** -0.9259 (-2.1010) ***
1.0542
1.4907
-0.0220
-44.8005
0.5070
(2.5119) *** -0.7349
-1.0347
0.0682
0.8656
-0.0051
-43.7423
0.6997
(7.5970) *** -1.2652
(-1.3545)
0.2516
0.6229
-0.00003
-55.1282
1.2606
(6.8093) *** -0.6114 (-2.5238) **
0.1977
1.0304
0.0150
4.7800
0.5990
(5.6791) *** 0.8917
0.2462
-0.778
1.2672
0.0278
9.0731
0.5990
(5.6791) *** (1.8710)
0.3606
*
1.2323
0.5793
-0.4124
-554.3217
1.5072
(2.8308) *** (-1.4313) (-1.9925) *
-0.3502
0.6930
-0.0028
-44.9275
-1.0166
(2.5951) *** -0.2406
-0.7905
-0.6572
0.8562
0.0085
0.9905
-0.3982
(3.8288) *** 0.5485
0.0439
0.0230
0.9352
0.0014
-7.8063
0.0869
(7.0704) *** 0.2536
-0.3053
-0.0329
1.2864
0.0005
-3.3988
-0.1451
(7.7107) *** 0.1762
-0.1830
0.3162
1.0635
-0.0011
-29.7562
1.0572
(3.7745) *** -0.3015
-0.9478
0.0440
1.3615
0.0069
8.5027
0.1267
(6.3574) *** 0.6553
0.3567
-0.1781
0.8450
-0.0002
-18.4977
-0.5950
(6.7611) *** -0.6314
-0.8742
-2.2744
0.8578
0.0132
-17.7279
(-2.4662) ** (3.7115) *** 1.0191
-1.6583
1.3941
1.3779
-0.0129
-61.7555
1.2185
(6.3880) *** -0.688
-0.8369
886
LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
PJAEE, 18 (13) (2021)
DISCUSSION
For leverage, there was an impact on the stock returns of two companies
included ANAAM INTERNATIONAL and TABUK. Meanwhile, another 14
companies found that leverage had no impact on stock returns. Besides,
market portfolio had impact on the stock returns. The coefficient was from
lowest value of -2.2744 to highest value of 1.3941. There were 7 companies
had negative leverage coefficient value and 9 companies had positive values
but only 2 companies were significance. The study result was similar with
previous study by Acheampong et al. [9] which found leverage had positive
coefficient in certain companies and negative coefficient in some companies in
same sector.
Meanwhile, market portfolio had impact on the stock returns with 1%
significance. The coefficient range of market portfolio varies from lowest
value of 0.5793 to highest value of 1.4907. All companies’ coefficient had
positive value and meant market portfolio had positive and significant impact
on Saudi stock return.
Besides, the firm size showed an impact only occurred with ANAAM
INTERNATIONAL stock returns. There were 15 companies found firm size
did not had impact on stock returns. The coefficient range varies from lowest
values of -0.00003 to highest value of 0.0278. In additions, 9 companies had
negative coefficient values and 7 companies had positive values.
Furthermore, the firm value which had an impact on the stock return of 3
companies which impacted on ALMARAI stock return with 1% significance,
ALJOUF company with 5% significance and 10% significance with
ALSHAQIAH. The coefficient range was from lowest value of 554.3217 to
highest value of 9.0731. Twelve companies had negative coefficient values
and 4 companies had positive values meant negative impact on Saudi stock
return but only 3 were significance. The result also suggested that explanatory
power of four factor model variable explained the stock returns variation of
these companies by 17.94% to 69.72%.
CONCLUSION
In conclusions, leverage, size and value did not have strong impact stock
return in Saudi Arabia compared to the market portfolio. The market portfolio
was only factor relevant which implied that CAPM was god proxy for return
in Agriculture and Food sector. Market portfolio was more relevant in this
sector but the application of the four-sector model giving the importance of
leverage should be used in other sectors.
ACKNOWLEDGMENTS
The authors would like to thank the College of Business, Effat University for
its unconditional support.
REFERENCES
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LEVERAGE IMPACT ON STOCK RETURNS IN SAUDI ARABIA
PJAEE, 18 (13) (2021)
Journal of Finance, 47,427-466.
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Westerfield, R.W. and Jaffe, J., and Ross, S. 2002. Administracão financeira:
corporate finance. São Paulo:Atlas.
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a study of Indian cement industry. International Journal of
Management Science, 2, 1, 31-42.
Penman, S., Richardson, S., and Tuna. I. 2007. The book to price effect in
stock returns: accounting for leverage. Journal of Accounting Research,
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Acheampong, P., Agalega, E. and Shibu, A. K. 2014. The effect of financial
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International Journal of Financial Research, 5, 1, 125.
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Dr. Shabir Hakim, Effat [email protected]
University, Saudi Arabia
Student, Abrar Alshehri, [email protected]
Effat University, Saudi
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