THE FINANCIAL LEVERAGE AND THE EFFECTS ON BETA: A STUDY OF THE STEEL’S AND METALLURGY’S COMPANIES LISTED ON BM&FBOVESPA

Resumen

This research has tested the financial leverage’s effects on the market beta and total beta of the steel’s and metallurgy’s companies listed on BM&F Bovespa. Twenty three from the twenty six companies have had appropriate information to analyze financial leverage, but, because of liquidity issues, only 11 firms have composed the portfolio to calculate the beta. We have calculated the quarterly beta in cross-sections periods, from January 2005 to June 2008, using daily data. To analyze financial leverage’s effect on beta, we have used linear regression and the difference of means test (t-test). The IBovespa index and S&P 500 index was used to represents the market portfolio. Consistent with prior literature, firm-specific betas were more unstable than the portfolio. The correlation between portfolio and IBovespa was 0.739 (p <0.001). Using the S&P 500, the correlation has decreased to 0.464 (p <0.001). The market beta of the steel’s and metallurgy’s companies using the IBovespa index was 0.93, but, using the S&P 500 the market beta has increased to 1.08. The sector’s total risk exposure using IBovespa index as a proxy was 1.25 and 2.33 using the S&P 500. The regression model has shown that financial leverage explains 11.4% of the market beta’s variations and 27.2% of total beta’s variations. In the Difference of means test we have identified that the levered companies have had higher betas and significantly different from the unlevered ones. We have concluded that financial leverage is positively associated with the risk of the steel’s and metallurgy’s companies listed on BM&FBovespa.