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Operating Leverage and Stock Returns: International Evidence

Author

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  • Luis García-Feijóo
  • Benjamin A. Jansen

Abstract

We empirically test theories predicting the association of operating leverage with stock returns and the value premium using an international data sample. Results suggest that operating leverage is related to stock returns and the value premium across the sampled countries. Results are robust to cross-country differences, typical controls, multiple definitions of operating and financial leverage, and while controlling for the endogeneity of operating and financial leverage. This suggests that the explanation for the presence of the value premium lies in the underlying risk exposure of fixed asset risk of operating leverage which is expressed through the value premium. Results further suggest that strengthening labor protection exogenously increases operating leverage.

Suggested Citation

  • Luis García-Feijóo & Benjamin A. Jansen, 2020. "Operating Leverage and Stock Returns: International Evidence," Working Papers 202002, Middle Tennessee State University, Department of Economics and Finance.
    • Handle: RePEc:mts:wpaper:202002
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    File URL: http://capone.mtsu.edu/berc/working/Operating_Leverage_and_Stock_Returns_International_Evidence_2_10_20.pdf
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    References listed on IDEAS

    as
    1. Chen, Huafeng Jason & Kacperczyk, Marcin & Ortiz-Molina, Hernán, 2011. "Labor Unions, Operating Flexibility, and the Cost of Equity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 25-58, February.
    2. Chan, K C & Chen, Nai-Fu, 1991. "Structural and Return Characteristics of Small and Large Firms," Journal of Finance, American Finance Association, vol. 46(4), pages 1467-1484, September.
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    More about this item

    Keywords

    Leverage; Value Premium; Stock Returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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