Abstract

http://ssrn.com/abstract=1787184
 
 

References (24)



 


 



Operating Leverage and Corporate Financial Policies


Matthias Kahl


University of Colorado at Boulder - Leeds School of Business

Jason Lunn


Smeal College of Business - Pennsylvania State University

Mattias Nilsson


University of Colorado at Boulder - Leeds School of Business

November 20, 2014

AFA 2012 Chicago Meetings Paper

Abstract:     
Using 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 and also much larger cash holdings than low fixed cost firms. This conservative behavior is not solely a result of a trade-off between operating leverage and financial leverage, since even high fixed cost firms without any debt in their capital structure have significantly larger cash holdings than similar low fixed cost firms. We show that the conservative financial policies allow high fixed cost firms to limit the amount by which they have to cut investment if sales are low. Our evidence also suggests that the financial conservatism of high fixed cost firms is 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: 52

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: November 21, 2014

Suggested Citation

Kahl, Matthias and Lunn, Jason and Nilsson, Mattias, Operating Leverage and Corporate Financial Policies (November 20, 2014). 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
Smeal College of Business - Pennsylvania State University ( email )
State College, PA 16801
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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