Can leverage effect coexist with value effect?
In this paper, we evaluate the cross sectional relationship betweenfirm characteris-tics,financial leverage, and stock returns for the Indian stock market. The studyfinds that thereare strong size and value effects existing in the return pattern of stocks, and alsofinds a complexpattern between leverage and stock returns in the Indian context. The Gibbons, Ross, andShanken (GRS) test confirms the robustness of three factor model with market, size, and lever-age over Fama-French three factor model (1993) in most cases. The Wald test confirms that theeffects of value and leverage are the same in determining portfolio returns in most cases. Fur-ther, study estimates show that portfolios formed using value and leverage breakpoints are notmuch sensitive to the results unlike portfolios formed using size breakpoints.