Leverage and stock returns

The variables, L1 to L10, are the portfolios are created from the deciles of the gross and net debt ratio of non-financial firms in Indian and Chinese markets. MKT represents excess return on the market portfolio (S&P BSE 500 index in India and Shanghai Stock Exchange Composite index in China). SMB (small minus big size portfolio), HML (high minus low B/M portfolio), and HLMLL (high minus low leverage portfolio) factor portfolios. SMB, HML, and HLMLL are obtained from 2x2x2 triple sort of the firms in each market. The firms are subject to sequential sorts of size, B/M, and leverage using median of each variable as the divider. From eight portfolio thus obtained, SMB is constructed as the difference in the returns of four small and four big portfolios, and HML and HLMLL are constructed from the difference in the returns of four high and four low B/M and leverage portfolios, respectively. The data on all variables used in the construction of portfolios was obstained from the Bloomberg Professional Databse.