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

Author

Listed:
  • Arnab Bhattacharjee

    (Heriot-Watt University)

  • Chris Higson

    (London Business School)

  • Sean Holly

    (University of Cambridge)

Abstract

‘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.

Suggested Citation

  • Arnab Bhattacharjee & Chris Higson & Sean Holly, 2014. "Asymmetric Price Adjustment, Sticky Costs and Operating Leverage over the Business Cycle," SEEC Discussion Papers 1402, Spatial Economics and Econometrics Centre, Heriot Watt University.
  • Handle: RePEc:hwe:seecdp:1402
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    References listed on IDEAS

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    More about this item

    Keywords

    Operating Margin; panel data; …fixed and ‡flexible costs; Business Cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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