Abstract
Operating leverage (OL) and profitability are interrelated determinants of stock returns. We show that the outperformance of firms with high OL is driven by periods of unconstrained aggregate funding conditions. Firms with high OL are more risky in general, but when the Fed eases funding constraints, investors bid up their stock prices to reflect lower risk and greater performance expected for these stocks. This time-varying OL effect also explains the differential performance of alternative profitability measures that treat OL differently. Our results extend research linking monetary policy, OL, and profitability by documenting important time-varying interrelations among these characteristics and returns.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
