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- Title
Can Operating Leverage Be the Cause of the Value Premium?
- Authors
García-Feijóo, Luis; Jorgensen, Randy D.
- Abstract
Recent theoretical models (Carlson, Fisher, and Giammarino, 2004) predict an association between the book-to-market equity ratio (BE/ME) and operating leverage in the cross-section. Consistent with these models, we find a positive association between BE/ME and the degree of operating leverage (DOL), between DOL and stock returns, and between DOL and systematic risk. Overall, our findings provide support for a risk-based explanation for the value premium that is consistent with existing theoretical models. The evolution of systematic risk associated with firm-level investment activity, rather than financial distress, seems to be the main determinant of the value premium.
- Subjects
FINANCIAL leverage; OPERATING leverage; FINANCIAL crises; MATHEMATICAL models; INVESTMENTS
- Publication
Financial Management (Wiley-Blackwell), 2010, Vol 39, Issue 3, p1127
- ISSN
0046-3892
- Publication type
Article
- DOI
10.1111/j.1755-053X.2010.01106.x