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Operating Leverage and Corporate Financial PoliciesMatthias KahlUniversity of Colorado at Boulder - Leeds School of Business Jason LunnUniversity of Colorado at Boulder - Leeds School of Business Mattias NilssonUniversity of Colorado at Boulder - Leeds School of Business November 5, 2012 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. The market values marginal cash holdings of high fixed cost firms more than those of low fixed cost firms. This suggests that the conservative financial policies of high fixed cost firms benefit their shareholders. 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: 51 Keywords: Operating leverage, fixed costs, capital structure, cash holdings, financial conservatism JEL Classification: G30, G32 working papers seriesDate posted: March 22, 2011 ; Last revised: November 8, 2012Suggested CitationContact Information
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