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Operating Leverage, Profitability, and Capital Structure

Journal of financial and quantitative analysis, 2019-02, Vol.54 (1), p.369-392 [Peer Reviewed Journal]

COPYRIGHT 2018, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON ;Copyright University of Washington, School of Business Administration Feb 2019 ;Copyright © Michael G. Foster School of Business, University of Washington 2018 ;ISSN: 0022-1090 ;EISSN: 1756-6916 ;DOI: 10.1017/s0022109018000595

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  • Title:
    Operating Leverage, Profitability, and Capital Structure
  • Author: Chen, Zhiyao ; Harford, Jarrad ; Kamara, Avraham
  • Subjects: Capital ; Capital markets ; Capital structure ; Financial leverage ; Leverage ; Operating costs ; Operating leverage ; Probability ; Profitability ; Quantitative analysis
  • Is Part Of: Journal of financial and quantitative analysis, 2019-02, Vol.54 (1), p.369-392
  • Description: 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.
  • Publisher: Seattle: Cambridge University Press
  • Language: English
  • Identifier: ISSN: 0022-1090
    EISSN: 1756-6916
    DOI: 10.1017/s0022109018000595
  • Source: ProQuest Central
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