Research on returns generated by debt (levered) and zero debt (unlevered) firms

Abstract

The Indian economy has changed over the last few decades and so has the thought process of investors. Today, the investors have become dynamic and are less risk averse. They are willing to experiment and put their money in hitherto less preferred avenues. This study has compared the returns generated by firms having debt in their capital structure and those not having debt in their capital structure. Theoretically, equity investors require more returns in a debt (levered) company as compared to the zero debt (unlevered) firm since they are taking more risk in leveraged companies. However, some studies in the past have found otherwise. The objective of this study is to ascertain whether leveraged companies have outperformed the zero debt companies. For the same two sample t-test is used and proves that when the times are good, the firms with low cost debt funds generate superior EPS which ultimately gets converted into higher equity returns and vice-versa.