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 and Reviews › RGC 21 - Publication in refereed journal › peer-review

106 Citations (Scopus)

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. Copyright © Michael G. Foster School of Business, University of Washington 2018.

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

Bibliographical note

Publication details (e.g. title, author(s), publication statuses and dates) are captured on an “AS IS” and “AS AVAILABLE” basis at the time of record harvesting from the data source. Suggestions for further amendments or supplementary information can be sent to [email protected].

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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. Copyright © Michael G. Foster School of Business, University of Washington 2018.

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Operating leverage, profitability, and capitala structure

Abstract

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