Size, value and leverage: how are they accounted for

This paper aims at improving the findings of the three-factor model, both adding a topical explanatory variable, financial leverage, and expanding the perspective to the European context. We perform both cross-sectional and time-series correlations to test the existence of a linear relation between factors studied and the company returns. For each factor, the authors break down the dataset into quartiles to investigate the possible return difference between the first and fourth quartile. Then, through a paired comparison test, the hypothesis that the mean vectors of the first and last quartile are equal is tested. Results indicate that small companies generate higher cumulative returns than large caps but, also bear a larger level of volatility. In the same way, value stock companies record better performances than growth stock companies but, a clear connection between values vs. growth factor and returns cannot be claimed. Cumulative returns of higher leveraged firms are only slightly superior to lower leveraged ones, with a comparable level of variance