This article's main goal is to analyze the impact of market operating leverage (OL) on expected stock returns. While OL has been analyzed substantially in the literature, the analysis of an aggregate measure is new. The article begins with a cross-section analysis of 184,280 firm-year US firms, after which a former literature analysis is confirmed with current data. Next, an Aggregate Operating Leverage (AOL) is constructed. AOL predicts market returns both in and out of sample. Moreover, AOL significantly predicts the S&P500 Index, which is also of great consequence to practitioners.
- asset pricing
- market returns
- operating leverage
- stock returns
All Science Journal Classification (ASJC) codes
- Economics, Econometrics and Finance(all)