The Impact of the Degree of Operating Leverage on Stock Returns: An Empirical Study in the Brazilian Market

Abstract:     
Empirical studies evaluating the impact of accounting information on the stock market have acquired great importance in the accounting literature and have become an instrument to assess the relevance and usefulness of accountancy itself. Following this path, we investigate the impact of the degree of operating leverage on stock returns in the Brazilian market. Since there is a widely documented relationship between the degree of operating leverage and systematic risk, and between the latter and stock returns, it should be logical to infer an association between the degree of operating leverage and stock returns. We perform empirical tests using panel-data regressions with no effects, fixed effects and random effects to test the hypothesis that the degree of operating leverage is one of the factors determining the systematic risk of stocks. Our sample includes data extending from 2001 to 2004 of firms listed on the Brazilian Stock Market (Bovespa). We find evidence of a positive and significant relationship between those two variables, as expected.

Number of Pages in PDF File: 14

Keywords: degree of operating leverage, stock returns, accounting information, Brazilian stock market

JEL Classification: G12, G32, G15, M41

Accepted Paper Series