Operating Leverage and Corporate Financial Policies

53 Pages Posted: 22 Mar 2011 Last revised: 3 Jun 2019

See all articles by Matthias Kahl

Matthias Kahl

Kelley School of Business, Indiana University

Jason Lunn

Smeal College of Business - Pennsylvania State University

Mattias Nilsson

U.S. Securities and Exchange Commission

Date Written: May 31, 2019

Abstract

Using a measure of operating leverage that directly reflects the importance of fixed operating costs in firms’ cost structures, we investigate why operating leverage is related to financial policies. High fixed cost firms have lower leverage and larger cash holdings than low fixed cost firms not only to avoid default. An important reason for their conservative financial policies is their desire to sustain investment when sales are low. Fixed costs have important consequences for other aspects of firm behavior. In particular, high fixed cost firms behave as if they are financially constrained even if by traditional measures they are unconstrained.

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

JEL Classification: G30, G32

Suggested Citation

Kahl, Matthias and Lunn, Jason and Nilsson, Mattias, Operating Leverage and Corporate Financial Policies (May 31, 2019). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787184 or http://dx.doi.org/10.2139/ssrn.1787184

Matthias Kahl (Contact Author)

Kelley School of Business, Indiana University ( email )

Department of Finance
1309 E. 10th Street
Bloomington, IN 47405
United States

Jason Lunn

Smeal College of Business - Pennsylvania State University ( email )

State College, PA 16801
United States

Mattias Nilsson

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
100 F Street NE
Washington, DC 20549
United States

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