Leverage Effect on Stock Price Volatility-A Study of Pharmaceutical Companies in India

In the present study, the effect of leverage on stock price volatility has been analyzed. To examine the hypothetical explanation for the leverage effect as it applies to the individual stock of the 116 pharmaceutical companies which are listed in BSE and NSE for the period of 11 years from 2005–2015. The volatility in stock price movement has been measured with the help of GARCH (1.1) model and the GARCH variable which is derived from the model is surrogated as the measure of volatility. In the next stage, the GARCH variable is regressed on leverage effect. For this purpose, leverage effect is measured as a rate of average debt to day-wise market capitalization of the company. The results of regression are calculated company wise and shown separately for the companies in each quartile. Quartiles are developed based on the debt-equity ratio of the companies. Leverage effect has significant impact on the stock price of the most of the companies. The study found that the majority of the companies have exhibited positive leverage effect on the volatility in the stock price.