Operating Leverage over the Business Cycle

Bhattacharjee, A, Higson, C J and Holly, S (2015) Operating Leverage over the Business Cycle. Working Paper. University of Cambridge.

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.