Measuring Operating Leverage

Measuring economic policy uncertainty

Huafeng (Jason) Chen, Jason V Chen, Feng Li and Pengfei Li

The Review of Asset Pricing Studies, 2022, vol. 12, issue 1, 112-154

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. (JEL G11, G12, G30)

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:12:y:2022:i:1:p:112-154.

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