Can Operating Leverage Be the Cause of the Value Premium? |
| |
| Authors: | Luis García-Feijóo Randy D Jorgensen |
| |
| Institution: | 1. Luis García-Feijóo is an Assistant Professor of Finance at Florida Atlantic University in Davie, FL.;2. Randy D. Jorgensen is an Associate Professor of Finance at Creighton University in Omaha, NE. |
| |
| Abstract: | 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. |
| |
| Keywords: | |
|
|
