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Operating Leverage over the Business Cycle

Author

Listed:
  • Arnab Bhattacharjee
  • Chris Higson
  • Sean Holly

Abstract

Operating leverage describes the extent to which a firm’s operating costs are fixed in the short run. The effect of operating leverage is to amplify the impact on profit of a change in revenues; an effect which is further amplified by financial leverage and by asymmetry in the tax system. In this paper we provide empirical estimates of operating leverage at the firm level, using a long panel of data on UK quoted firms. We report sectoral differences in operating leverage around the business cycle, and show that these can be partly explained in terms of costly labour adjustment and asymmetric price adjustment.

Suggested Citation

  • Arnab Bhattacharjee & Chris Higson & Sean Holly, 2015. "Operating Leverage over the Business Cycle," Cambridge Working Papers in Economics 1535, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1535
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    More about this item

    Keywords

    operating margin; panel data; fixed and flexible costs; business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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