← Search

The Review of Asset Pricing Studies Vol. 12 No. 1 2022

Measuring Operating Leverage

Huafeng Chen1; Jason V. Chen2; Feng Li3; Pengfei Li4

1 FISF, Fudan University · 2 University of Illinois at Chicago · 3 Shanghai Advanced Institute of Finance, Shanghai Jiaotong University · 4 PBC School of Finance, Tsinghua University

Abstract

We examine a simple measure of operating leverage: the ratio of fixed costs (measured by depreciation and amortization plus selling, general, and administrative expenses) to the market (or book) value of assets. We find that this measure of operating leverage positively predicts returns. This operating leverage measure is not explained by common factors and performs better than the traditional measures of operating leverage. Furthermore, an exploratory two-factor model with the operating leverage factor works at least as well as, but does not subsume, the Fama and French five-factor model.

DOI
10.1093/rapstu/raab025
Volume
12
Issue
1
Pages
112-154
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite