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Asymmetric Price Adjustment, Sticky Costs and Operating Leverage over the Business Cycle

  • Arnab Bhattacharjee

    (Heriot-Watt University)

  • Chris Higson

    (London Business School)

  • Sean Holly

    (University of Cambridge)

‘Operating leverage’describes the extent to which a …Firm’s operating costs are fi…xed in the short term. Operating leverage ampli…es the earnings impact of a change in revenues; an effect which is further amplified by fi…nancial leverage and by non-proportionality in the tax system. Since the costs of adjusting capacity are likely to vary depending on the nature of the inputs, we expect to see sectoral differences in operating leverage around the business cycle and, indeed, differential adjustment costs underlie the distinction between cyclical and non-cyclical fi…rms that is popular with fi…nancial market practitioners. We fi…nd using a large data set on quoted UK companies between 1966 and 2010 that there are significant differences among sectors in the way it which operating leverage adjusts.

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Paper provided by Spatial Economics and Econometrics Centre, Heriot Watt University in its series SEEC Discussion Papers with number 1402.

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Date of creation: 2014
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Handle: RePEc:hwe:seecdp:1402
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  1. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
  2. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  3. Edward F. Blackburne III & Mark W. Frank, 2007. "Estimation of nonstationary heterogeneous panels," Stata Journal, StataCorp LP, vol. 7(2), pages 197-208, June.
  4. A. Bhattacharjee & Higson, C. & Holly, S. & Kattuman, P., 2002. "Macro Economic Instability and Business Exit: Determinants of Failures and Acquisitions of Large UK Firms," Cambridge Working Papers in Economics 0206, Faculty of Economics, University of Cambridge.
  5. Robert Novy-Marx, 2011. "Operating Leverage," Review of Finance, European Finance Association, vol. 15(1), pages 103-134.
  6. Bhaskar, V & Machin, Stephen & Reid, Gavin C, 1993. "Price and Quantity Adjustment over the Business Cycle: Evidence from Survey Data," Oxford Economic Papers, Oxford University Press, vol. 45(2), pages 257-68, April.
  7. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
  8. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  9. Bhattacharjee, A. & Higson, C. & Holly, S. & Kattuman, P., 2004. "Business Failure in UK and US Quoted Firms: Impact of Macroeconomic Instability and the Role of Legal Institutions," Cambridge Working Papers in Economics 0420, Faculty of Economics, University of Cambridge.
  10. Bhattacharjee, Arnab & Holly, Sean, 2009. "Understanding Interactions in Social Networks and Committees," SIRE Discussion Papers 2009-53, Scottish Institute for Research in Economics (SIRE).
  11. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  12. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  13. Gottfries, Nils, 1991. "Customer Markets, Credit Market Imperfections and Real Price Rigidity," Economica, London School of Economics and Political Science, vol. 58(231), pages 317-23, August.
  14. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
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