What explains the value premium? The case of adjustment costs, operating leverage and financial leverage

Viet Nga Cao

Journal of Banking & Finance, 2015, vol. 59, issue C, 350-366

Abstract: This paper empirically examines and compares the different theoretical predictions on how adjustment costs, operating and financial leverage influence the value premium. Consistent with Ozdagli (2012), financial leverage plays a dominant role, supported by adjustment costs (which represent the degree of investment irreversibility). Specifically, the observed value premium is driven by the financial leverage differences between value and growth firms, partially neutralized by investment irreversibility. The relation between the value premium and investment irreversibility is contrary to the intuition in Zhang (2005) and Cooper (2006). Operating leverage does not significantly influence the value premium.

Keywords: Value premium; Investment irreversibility; Adjustment costs; Operating leverage; Financial leverage (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:59:y:2015:i:c:p:350-366

DOI: 10.1016/j.jbankfin.2015.04.033

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