Operating Leverage and Stock Returns: International Evidence

Abstract

We use an international sample of 20 developed countries to test theories predicting an association between operating leverage with stock returns and the value premium. Results suggest that operating leverage is related to stock returns and the value premium across the sampled countries. These results are robust to multiple definitions of operating and financial leverage, and the endogeneity of operating and financial leverage. Results on the association between financial leverage and the value premium are sensitive to variable definitions. Consistent with recent theories, we also find that a country’s labor share is positively associated with the value premium. Overall, we find support for the notion that the value premium reflects compensation for exposure to systematic operating risk.