Abstract

http://ssrn.com/abstract=1787184
 
 

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Operating Leverage and Corporate Financial Policies


Matthias Kahl


University of Colorado at Boulder - Leeds School of Business

Jason Lunn


University of Colorado at Boulder - Leeds School of Business

Mattias Nilsson


University of Colorado at Boulder - Leeds School of Business

July 30, 2013

AFA 2012 Chicago Meetings Paper

Abstract:     
We develop a measure of operating leverage that directly reflects the importance of fixed operating costs in firms’ cost structures. We show that high fixed cost firms have lower leverage ratios but also much larger cash holdings than low fixed cost firms. This policy allows them to limit the amount by which they have to cut investment if sales are low. Our evidence suggests that the conservative financial policies of high fixed cost firms are value-maximizing. We conclude that operating leverage is an important determinant of financial policies and helps explain why many firms have very low net leverage ratios.

Number of Pages in PDF File: 53

Keywords: Operating leverage, fixed costs, capital structure, cash holdings, financial conservatism

JEL Classification: G30, G32

working papers series





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Date posted: March 22, 2011 ; Last revised: July 31, 2013

Suggested Citation

Kahl, Matthias and Lunn, Jason and Nilsson, Mattias, Operating Leverage and Corporate Financial Policies (July 30, 2013). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1787184 or http://dx.doi.org/10.2139/ssrn.1787184

Contact Information

Matthias Kahl (Contact Author)
University of Colorado at Boulder - Leeds School of Business ( email )
UCB 419
Boulder, CO 80309-0419
United States
(303) 492-0141 (Phone)
Jason Lunn
University of Colorado at Boulder - Leeds School of Business ( email )
Boulder, CO 80309-0419
United States
Mattias Nilsson
University of Colorado at Boulder - Leeds School of Business ( email )
Campus Box 419
Boulder, CO 80309
United States
+1-303-492-2289 (Phone)
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