Asymmetric Price Adjustment, Sticky Costs and Operating Leverage over the Business Cycle

Bhattacharjee, A, Higson, C and Holly, S (2014) Asymmetric Price Adjustment, Sticky Costs and Operating Leverage over the Business Cycle. Discussion Paper. SEEC Discussion Papers.

Abstract

'Operating leverage' describes the extent to which a firm's operating costs are fixed in the short term. Operating leverage amplifies the earnings impact of a change in revenues; an effect which is further amplified by financial leverage and by non-proportionality in the tax system. Since the costs of adjusting capacity are likely to vary depending on the nature of the inputs, we expect to see sectoral differences in operating leverage around the business cycle and, indeed, differential adjustment costs underlie the distinction between cyclical and non-cyclical firms that is popular with financial market practitioners. We find using a large data set on quoted UK companies between 1966 and 2010 that there are significant differences among sectors in the way it which operating leverage adjusts.