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Can Operating Leverage Be the Cause of the Value Premium?

Financial management, 2010-09, Vol.39 (3), p.1127-1154 [Peer Reviewed Journal]

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Title:
Can Operating Leverage Be the Cause of the Value Premium?
Author: García-Feijóo, Luis ; Jorgensen, Randy D.
Subjects: Analysis ; Determinants ; Equity ; Financial investments ; Financial leverage ; Financial models ; Financial portfolios ; Financial theory ; Growth stocks ; Investment ; Investment risk ; Investments ; Management ; Market analysis ; Operating leverage ; Rates of return ; Rice ; Risk premiums ; Stock prices ; Stock returns ; Stocks ; Studies ; Systematic risk ; Time series ; Value stocks
Is Part Of: Financial management, 2010-09, Vol.39 (3), p.1127-1154
Description: 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.
Publisher: Melbourne, Australia: Blackwell Publishing Asia
Language: English
Identifier: ISSN: 0046-3892
EISSN: 1755-053X
DOI: 10.1111/j.1755-053X.2010.01106.x
Source: Alma/SFX Local Collection

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