With this factor, we wanted to test if the amount of debt a company had on its balance sheet impacted its stock price over the following 12 months. To do this, we used the net debt (long-term debt minus excess cash) to the market value ratio.
The results above show that the market rewards companies that take risks and punishes those that are too conservative. Companies with high cash balances and, thus, low debt-to-market value ratios (Q1) underperform those with less cash and a high amount of debt (on average).
This was most extreme with mid-sized companies where returns are linear, and highly leveraged companies outperformed companies with low amounts of leverage by over 140%. But overall, the results were mixed, showing the net debt-to-market value ratio as a weak factor for achieving market outperformance.