Operating Leverage and Corporate Financial Policies
53 Pages Posted: 22 Mar 2011 Last revised: 3 Jun 2019
Date Written: May 31, 2019
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: Suggested Citation