Review of Finance Vol. 15 No. 1 2011
Operating Leverage
Abstract
I derive and test implications of the operating leverage hypothesis for the cross-section of expected returns. Using a novel measure of operating leverage, I document that operating leverage predicts returns in the cross-section, and that strategies formed by sorting on operating leverage earn significant excess returns. Operating leverage also explains why the value premium is weak and non-monotonic across industries, but strong and monotonic within industries. Intra-industry differences in book-to-market are driven by differences in operating leverage, giving rise to expected return differences. Industry differences in book-to-market are driven by differences in the capital intensity of production unrelated to returns.
- DOI
- 10.1093/rof/rfq019
- Volume
- 15
- Issue
- 1
- Pages
- 103-134
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref