Operating leverage, profitability, and capitala structure

Zhiyao CHEN; Jarrad HARFORD; Avraham KAMARA

doi:10.1017/S0022109018000595

Operating leverage, profitability, and capitala structure

Zhiyao CHEN, Jarrad HARFORD, Avraham KAMARA^*

^*Corresponding author for this work

Research output: Journal Publications › Journal Article (refereed) › peer-review

52 Citations (SciVal)

Abstract

Operating leverage increases profitability and reduces optimal financial leverage. Thus, operating leverage generates a negative relation between profitability and financial leverage that is thought to be inconsistent with the trade-off theory but is commonly observed in the data. We demonstrate the effect of operating leverage on firms' profitability and financial leverage, as well as on the empirical relation between profitability and financial leverage, by using China's entry into the World Trade Organization in 2001 and its effect on the capital-labor ratio of U.S. firms.

Original language	English
Pages (from-to)	369-392
Number of pages	24
Journal	Journal of Financial and Quantitative Analysis
Volume	54
Issue number	1
Early online date	9 Nov 2018
DOIs	https://doi.org/10.1017/S0022109018000595
Publication status	Published - Feb 2019
Externally published	Yes

Bibliographical note

We thank Philip Bond, Jennifer Conrad (the editor), Max Croce (Conference on Financial Economics and Accounting (CFEA) discussant), Ran Duchin, Itay Goldstein, John Graham (the referee), Christopher Hennessy, Israela Kamara, Jennifer Koski, Paul Malatesta, Thomas Noe, Stephen McKeon (European Financial Association (EFA) discussant), Ilya Strebulaev, Mark Westerfield, Xueping Wu (China International Conference in Finance (CICF) discussant), and seminar participants at the Chinese University of Hong Kong, the University of Texas at Dallas, and the University of Washington.

Access to Document

10.1017/S0022109018000595

Cite this

@article{220a076db4814507a7f3b4164ed4f2d1,

title = "Operating leverage, profitability, and capitala structure",

abstract = "Operating leverage increases profitability and reduces optimal financial leverage. Thus, operating leverage generates a negative relation between profitability and financial leverage that is thought to be inconsistent with the trade-off theory but is commonly observed in the data. We demonstrate the effect of operating leverage on firms' profitability and financial leverage, as well as on the empirical relation between profitability and financial leverage, by using China's entry into the World Trade Organization in 2001 and its effect on the capital-labor ratio of U.S. firms.",

author = "Zhiyao CHEN and Jarrad HARFORD and Avraham KAMARA",

note = "We thank Philip Bond, Jennifer Conrad (the editor), Max Croce (Conference on Financial Economics and Accounting (CFEA) discussant), Ran Duchin, Itay Goldstein, John Graham (the referee), Christopher Hennessy, Israela Kamara, Jennifer Koski, Paul Malatesta, Thomas Noe, Stephen McKeon (European Financial Association (EFA) discussant), Ilya Strebulaev, Mark Westerfield, Xueping Wu (China International Conference in Finance (CICF) discussant), and seminar participants at the Chinese University of Hong Kong, the University of Texas at Dallas, and the University of Washington.",

year = "2019",

month = feb,

doi = "10.1017/S0022109018000595",

language = "English",

volume = "54",

pages = "369--392",

journal = "Journal of Financial and Quantitative Analysis",

issn = "0022-1090",

publisher = "Cambridge University Press",

number = "1",

}

TY - JOUR

T1 - Operating leverage, profitability, and capitala structure

AU - CHEN, Zhiyao

AU - HARFORD, Jarrad

AU - KAMARA, Avraham

N1 - We thank Philip Bond, Jennifer Conrad (the editor), Max Croce (Conference on Financial Economics and Accounting (CFEA) discussant), Ran Duchin, Itay Goldstein, John Graham (the referee), Christopher Hennessy, Israela Kamara, Jennifer Koski, Paul Malatesta, Thomas Noe, Stephen McKeon (European Financial Association (EFA) discussant), Ilya Strebulaev, Mark Westerfield, Xueping Wu (China International Conference in Finance (CICF) discussant), and seminar participants at the Chinese University of Hong Kong, the University of Texas at Dallas, and the University of Washington.

PY - 2019/2

Y1 - 2019/2

N2 - Operating leverage increases profitability and reduces optimal financial leverage. Thus, operating leverage generates a negative relation between profitability and financial leverage that is thought to be inconsistent with the trade-off theory but is commonly observed in the data. We demonstrate the effect of operating leverage on firms' profitability and financial leverage, as well as on the empirical relation between profitability and financial leverage, by using China's entry into the World Trade Organization in 2001 and its effect on the capital-labor ratio of U.S. firms.

AB - Operating leverage increases profitability and reduces optimal financial leverage. Thus, operating leverage generates a negative relation between profitability and financial leverage that is thought to be inconsistent with the trade-off theory but is commonly observed in the data. We demonstrate the effect of operating leverage on firms' profitability and financial leverage, as well as on the empirical relation between profitability and financial leverage, by using China's entry into the World Trade Organization in 2001 and its effect on the capital-labor ratio of U.S. firms.

UR - http://www.scopus.com/inward/record.url?scp=85056469477&partnerID=8YFLogxK

U2 - 10.1017/S0022109018000595

DO - 10.1017/S0022109018000595

M3 - Journal Article (refereed)

AN - SCOPUS:85056469477

SN - 0022-1090

VL - 54

SP - 369

EP - 392

JO - Journal of Financial and Quantitative Analysis

JF - Journal of Financial and Quantitative Analysis

IS - 1

ER -

Operating leverage, profitability, and capitala structure

Abstract

Bibliographical note

Access to Document

Other files and links

Fingerprint

Cite this