High Operating Leverage Research Articles

Operating Leverage and Stock Returns under Different Aggregate Funding Conditions

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. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: E22; E44; E52; G11; G12; G14.

Nonregular Employment and Payout Policy: Evidence from the Massachusetts Independent Contractor Law

Compared with regular employees, independent contractors (ICs) offer labor flexibility and cost savings to their employers. Using a difference-in-differences design around the 2004 Massachusetts law that discourages IC usage, we find that this exogenous decrease in IC usage makes treated firms’ earnings more sensitive to changes in sales, increases labor-related expenses, and reduces profitability. Firms subsequently reduce share repurchases. The decrease is more pronounced for firms with high operating leverage and financial constraints. Our results are robust to entropy balancing. We conclude that IC usage affects firms’ operating leverage and profitability, which in turn, influence payout policy. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.00103 .

Analysis of Financial Structure on Profitability and Non-Financial Performance in Industrial Companies

Non-financial performance can be used to determine the success of the company and show the growth of a company. This study aims to examine and analyze the effect of Financial Structure (Working Capital, Asset Structure, and Operating Leverage) on Profitability and Non-Financial Performance in Industrial Companies. The sampling method used is the census method, which is a comprehensive sampling of 15 companies with a 3-year research period from 2019 to 2021. Method A the analysis is with method Partificial Least Square (PLS) using the Smart program PLS 2.0. The results of the analysis show that working capital and asset structure have an effect on profitability. Working capital, asset structure and operating leverage have no effect on non-financial performance. Profitability has an effect on Non-Financial Performance. Profitability mediates the effect of Working Capital and Asset Structure on Non-Financial Performance. Profitability does not mediate the effect of Operating Leverage on Non-Financial Performance. The result shows, that all proposed hypotheses are accepted except Hypothesis High Operating Leverage does not affect the Company's Non-Financial Performance. The company can grow and develop, and can increase the company's profitability by increasing its own capital and reducing some of the company's debt. Non-financial performance can be improved by providing fast, good, and satisfying service to consumers.
 Keywords —Working Capital; Asset Structure; Operating Leverage; Profitability; Non-Financial Performance

Does green credit policy impact corporate cash holdings?

This paper investigates the impact of green credit policy on the cash holdings of high-polluting firms based on the enforcement of China's “Green Credit Guidelines”. We find a significant positive effect of green credit policy on corporate cash holdings. The results are consistent after a series of robust tests and excluding the confounding events. The positive effect is more pronounced for private firms, firms with high industry competition and firms with high operating leverage. What's more, we find the potential mechanism for the positive relationship, reducing the bank loans and liabilities, which exacerbates the external financing environment. Finally, we document that the policy effect decreases the high-polluting firms' risk-taking. Our study sheds light on the challenges brought by the green credit policy on the high-polluting firms, expanding the prior literature.

Faaliyet Kaldıracının Finansal Performans Üzerindeki Etkisini Belirlemede Satış Büyümesinin Rolü: Türkiye Örneği

This article analyses the impact of sales growth on the association between operating leverage and financial performance. Using a sample of 200 firms listed on Istanbul Stock Exchange over the period from 2008 to 2017, we find that operating leverage has a negative effect on profitability, and that the negative effect of operating leverage is stronger (weaker) for firms with low (high) sales growth. It implies that sales growth mitigates the negative impact of operating leverage on profitability. These results confirm that firms with high operating leverage should increase sales level to enhance their financial performance.

Operating Leverage, Profitability, and Stock Returns under Different Aggregate Funding Conditions

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.

Information sensitivity of corporate bonds: Evidence from the COVID-19 crisis

We explore the information sensitivity of corporate bonds throughout the COVID-19 crisis by examining whether there is a differential market response to firms with high operating leverage. Our results show that investors appear to discriminate based on firm operating leverage, which estimates the inability to adjust operating inputs quickly. Spreads of high operating leverage firms increase by 70 basis points upon the Fed’s corporate credit facilities announcement, while spreads from all other firms decreased, indicating concern about potential downgrades. When the facilities expanded, which made some downgraded firms eligible, spreads declined by 146 basis points for highly leveraged firms.

From static to dynamic cost structures: The case of the railroad industry

AbstractFirms with fixed operating costs have high operating leverage. This leverage increases the sensitivity of earnings before interest and taxes (EBIT) to changes in revenues. Railroads have high fixed costs and high operating leverage. One would rationally expect that a substantial and secular decline in this industry's revenues would lead to severe and negative effects on operating income and free cash flow. The industry did indeed experience a secular decline in its most important business segment, hauling bituminous coal. In this clinical investigation, we use this unique industry event to study operating leverage and changes to the industry's cost structure. Using several methodologies, we measure the changes in the industry's cost structure and we demonstrate how the changes mitigated the expected negative effects of its revenue decline. Additionally, we demonstrate that static measures of an industry's cost structure are likely to produce suboptimal forecasts. Finally, our findings have implications for financial planning and valuation of firms with high operating leverage, and they provide a renewed impetus for research into the dynamic relationship between fixed and variable costs.

On Black’s Leverage Effect in Firms with No Leverage

One of the most enduring empirical regularities in equity markets is the inverse relationship between stock prices and volatility. Also known as the leverage effect, this relationship was first documented by Black, who attributed it to the effects of financial or operating leverage. This article documents that firms that had no debt (and thus no financial leverage) from January 1973 to December 2017 exhibit Black’s leverage effect. Moreover, the authors find that the leverage effect of firms in this sample is not driven by operating leverage. On the contrary, in this sample the leverage effect is stronger for firms with low operating leverage as compared to those with high operating leverage. Interestingly, the firms with no debt from the lowest quintile of operating leverage exhibit a leverage effect that is on par with or stronger than that of debt-financed firms. <b>TOPICS:</b>Fundamental equity analysis, equity portfolio management, accounting and ratio analysis <b>Key Findings</b> • The inverse relationship between stock prices and volatility is often attributed to the effects of leverage and is known as the leverage effect. • We find that firms with no debt (and thus no financial leverage) exhibit the leverage effect. • Interestingly, among the firms with no debt, those with the lowest levels of operating leverage exhibit the strongest leverage effect.

A Financial Analysis of John Wood Group Plc

This report focuses on the financial analysis of John Wood Group Plc. It was aimed at analysing the company’s risk profile with regards to business risk, systematic risk, financial risk, and trend and comparative analysis. Furthermore, it also aimed at evaluating four approaches to company valuation, and the past and possible future agency problems in the company. The report used the company’s annual accounts from 2010 to 2013 and for comparative purpose, two peers were considered. It was observed from the analysis that the business risk and systematic risks were high while the financial risk was low. On the company valuations, the Dividend Valuation Model (DVM) was selected among other models because the DVM computed value of the company was closest to the market value. More so, it was also observed based on the analysis that agency problems existed in the past and could possibly occur in the future. The report recommended that the company’s business risk could be minimised by maintaining high operating leverage during boom and low operating leverage during recession. In doing this, it suggested the need for trade-off between financial leverage and operating leverage. Furthermore, the reported recommended various measures the company could mitigate and avert possible occurrence of agency problem.

Managerial incentives, options, and cost-structure choices

This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the selling, general, and administrative (SG&A) and research and development (R&D) cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.

Managerial Incentives, Options, and Cost-Structure Choices

This study explores a relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find that managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the SG&A and R&D cost components, in response to reductions in option-based compensation after the issuance of SFAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.

Changes in Non‐current Assets and in Property, Plant and Equipment and Future Stock Returns: The UK Evidence

AbstractWe examine the effect of changes in non‐current operating assets (NCOA) and of changes in property, plant and equipment (PPE) on future abnormal stock returns using a sample of 21,549 UK non‐financial firm observations over the 1990–2012 event period. The results from a matching portfolio procedure and 4‐factor regressions indicate that abnormal returns from investing in a portfolio of low‐minus‐high quintile NCOA and PPE change firms are between 5.5% and 6.1%. This negative association is confirmed by cross‐sectional regressions. The economic significance of mispricing seems weaker than in the US and weaker than the mispricing of working capital accruals adjusted for depreciation in the UK. Changes in PPE drive the predictability of share returns with respect to changes in NCOA. There is no significant evidence that return predictability is stronger in less liquid firms. We find two strands of evidence that lend some support to behavioural explanations of predictability through overreaction to investment. On one hand, fundamental information about investment explains one‐third of the predictability of returns while, on the other, predictability is generally not significantly stronger in firms with high operating leverage as a proxy for risk.

An Exploratory Study on Learner’s Perception Towards E-Learning Courses

Online courses continue to nurture in higher education environment. Students are increasingly demanding online access, and universities and colleges are working on it since, students are increasingly demanding online access to meet the demands. E-Learning is an emerging methodology of modern education. It is growing very fast for last two decades in the education sector. All the university’s, schools and companies started offering online courses to satisfy the student needs, and to improve employee effectiveness. E-Learning can deliver more value at very less cost than any other traditional mode of education. This advantage is attached with high-operating leverage for e-Learning companies, should translate them into elevated margins and returns on capital in the industry. E-Learning provides more advantage and user friendly even though it has disadvantages. There are many issues that remain still to be resolved including challenges in assessment, plagiarism and high drop-out rates at E-Learning. It provided classes likes recorded lectures, E-Books, Blogs, Wikis etc. But it’s not focused on the learner’s perception. On considering these issues it is forward for research which is discussed as further. By the way the course will be getting more effective in psychological perceptive of learner and it will create an effective learning process. Research findings suggest that the learner perception could be both positive and negative, and it’s varying based on the learners Age, and Gender. DOI: 10.5901/mjss.2015.v6n5p562

Current Trends in E-Learning and Future Scenario

E-Learning is an emerging methodology of modern education. It is gradually growing very fast for last two decades in the education sector. All the university, schools and companies started offering online courses to satisfy the student needs, and to improve employee effectiveness. E-Learning can deliver more value at very less cost than any other traditional mode of education. This advantage is attached with high-operating leverage for e-Learning companies, should translate them into elevated margins and returns on capital in the industry. E-Learning provides more advantage and user friendly even though it has disadvantages. There are many issues that remain to be resolved including problems with assessment, plagiarism and high drop-out rates encountered at E-Learning. The findings released by the MIT-Harvard MOOCs collaboration are also known as edX with a University of Pennsylvania study that concluded only 4 percent of people who register for online course actually finished them. E-Learning provide classes as recorded lectures, E-Books, Blogs, Wikis etc. but it do not concentrate on the learner’s perception. On considering these issues it is forward for research which is discussed as further. By the way the course will be getting more effective in psychological perceptive of learner and it will create an effective teaching and learning process. This study is based on the current trends of E-Learning and its future scenario towards the research process on educational technology. The scope of the e-learning has spread its root wide and depth in all educational institutions varies from schools to colleges and even in organisation for training and development for their employees. DOI: 10.5901/mjss.2015.v6n5p484

DISCUSSION OF: An Empirical Investigation of the Relationship between Profitability Persistence and Firms' Choice of Business Model: Evidence from the U.S. Airline Industry

T he Collins et al. (2011) study (hereafter, CRC) examines how the competitive strategies of airlines impact the persistence of their operating earnings. The study then investigates if the persistence of earnings components, such as unit prices, costs, and productivity changes, also varies by competitive strategy. The study uses 590 observations of quarterly financial performance from 14 airline companies, over the period 1996 to 2008, to examine the impact of different competitive strategies on the persistence of profit margins and asset turnover. Two airlines’ competitive strategies are identified: network carriers and low-cost providers. The paper documents that network airlines (differentiators) have more persistent operating profit margins than low-cost carriers. Little difference is noted for total asset turnover across business models. The study also demonstrates that partitioning the change in profit margin into growth, price-recovery, and productivity components more fully explains future profit margins than current profit margin alone. The paper is a nice blend of the literatures in industrial economics and both financial and management accounting. There are two strings in the paper that are interesting to management and management accountants. One is how a firm’s competitive strategy impacts the persistence of profit margins and asset turnover ratios, which are the two key components of return on assets using the DuPont formula. The other interesting issue is the examination of how volume, price, and productivity components of profit margin changes impact earnings persistence differently across competitive strategies. As this latter part of the paper uses traditional variance analysis and productivity measures, it is particularly interesting to management accountants. Below, I discuss these two inter-related issues.

Which investment incentives for tourism?

Governments around the world offer a wide range of incentives to developers by acting to reduce capital costs and operating costs and to improve investment security. This analysis demonstrates that high operating leverage is a principal source of financial risk and that grants to reduce initial capital costs are more effective in reducing risk. Apart from guaranteed investment security most tourism incentives are unnecessary — the primary instrument should be the capital grant, or its equivalent in the provision of facilities.