Operating leverage and stock returns under different aggregate funding conditions

Garcia-Feijoo, L., T.K. Jensen, and P.D. Koch. 2023. Operating leverage and stock returns under different aggregate funding conditions. The Accounting Review, forthcoming.

61 Pages Posted: 30 Jun 2021 Last revised: 2 Dec 2023

See all articles by Luis García-Feijóo

Luis García-Feijóo

Florida Atlantic University - Department of Finance

Tyler Jensen

Iowa State University - Ivy College of Business - Department of Finance

Paul Koch

Iowa State University; University of Auckland Business School; The University of Sydney

Date Written: November 29, 2023

Abstract

We document time-varying interrelations between aggregate funding conditions and the impact of operating leverage (OL) on stock returns. OL represents a primitive source of risk, which helps explain the well-established unconditional relation between OL and future returns. However, the outperformance of firms with high OL occurs exclusively during periods of unconstrained funding. Although high OL represents operational inflexibility, when the Fed eases funding constraints, improved capital availability mitigates this inflexibility. Consequently, investors bid up the prices of stocks with high OL when aggregate funding constraints are loosened to reflect their lower risk and greater expected performance in unconstrained periods.

Keywords: Operating leverage, aggregate funding conditions, monetary policy, sticky input prices, time-varying risk premium

JEL Classification: E22, E44, E52, G11, G12, G14

Suggested Citation

Garcia-Feijoo, Luis and Jensen, Tyler and Koch, Paul, Operating leverage and stock returns under different aggregate funding conditions (November 29, 2023). Garcia-Feijoo, L., T.K. Jensen, and P.D. Koch. 2023. Operating leverage and stock returns under different aggregate funding conditions. The Accounting Review, forthcoming., Available at SSRN: https://ssrn.com/abstract=3870016 or http://dx.doi.org/10.2139/ssrn.3870016

Luis Garcia-Feijoo

Florida Atlantic University - Department of Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States
954-236-1239 (Phone)

Tyler Jensen (Contact Author)

Iowa State University - Ivy College of Business - Department of Finance ( email )

Ivy College of Business
3230 Gerdin Business Building
Ames, IA 50011-2063
United States

Paul Koch

Iowa State University ( email )

Ames, IA 50011-2063
United States
5152942491 (Phone)
5152943355 (Fax)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

University of Auckland Business School ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

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