Operating Leverage
I derive and test implications of the operating leverage hypothesis for the cross-section of expected returns. Using a novel measure of operating leverage, I document that operating leverage predicts returns in the cross-section, and that strategies formed by sorting on operating leverage earn significant excess returns. Operating leverage also explains why the value premium is weak and non-monotonic across industries, but strong and monotonic within industries. Intra-industry differences in book-to-market are driven by differences in operating leverage, giving rise to expected return differences. Industry differences in book-to-market are driven by differences in the capital intensity of production unrelated to returns. Copyright 2011, Oxford University Press.
Year of publication: |
2011
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Authors: | Novy-Marx, Robert |
Published in: |
Review of Finance. - European Finance Association - EFA, ISSN 1572-3097. - Vol. 15.2011, 1, p. 103-134
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Publisher: |
European Finance Association - EFA |
Saved in:
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