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Kauppakorkeakoulun julkaisuportaali
Aalto-yliopiston kauppakorkeakoulun gradujen tiedot nyt Aaltodocissa: Aaltodoc-julkaisuarkisto
Kauppakorkeakoulu | Rahoituksen laitos | Rahoitus | 2015
Tutkielman numero: 14071
Operating leverage and corporate financial policies: European evidence
Tekijä: Saarela, Jesse
Otsikko: Operating leverage and corporate financial policies: European evidence
Vuosi: 2015  Kieli: eng
Laitos: Rahoituksen laitos
Aine: Rahoitus
Asiasanat: rahoitus; financing; kustannukset; costs; liiketalous; business economics; velat; debt; investoinnit; investment
Sivumäärä: 64
Avainsanat: operating leverage; cost structure; financial policy; financial conservatism; leverage; cash holdings; dividends

In this thesis, I study the effect of operating leverage, the proportion of fixed costs in a firm's cost structure, on the financial policies of European firms. Primarily I examine whether higher fixed costs contribute to conservative policies in terms of lower leverage ratios and higher cash holdings. I also study what contributes to the observed policies, and how the policies affect the investment spending of firms. Finally, I analyze how operating leverage affects the inclination to pay dividends and the dividend payout ratio of firms.


The sample consists of all firm-year observations from EU15 countries in the Thomson One Worldscope database from 1990 to 2013 with the relevant data available. First, I construct a cost structure metric that estimates the sensitivity of operating costs to changes in sales after accounting for growth trends. Then, I analyze the relation between operating leverage and financial policy determinants primarily with multiple OLS regression models and tests of differences. I also utilize logit models on the estimation of zero leverage and zero dividend.


I find that firms with high fixed costs have significantly lower leverage ratios than firms with low fixed costs. They also have considerably larger cash holdings, even among firms with zero debt. An important determinant of the lower leverage ratios of high fixed cost firms is that they issue more equity than low fixed cost firms. High fixed cost firms also save significantly more out of their cash flow and from both debt and equity issues, which contributes to their higher cash holdings. I also find evidence that high fixed cost firms have become more financially conservative over time than low fixed cost firms.

Furthermore, I find that high fixed cost firms are less affected in their investment spending due to low sales growth than low fixed cost firms. Regarding dividend payments, high fixed cost firms are also more likely to not pay dividends. However, I do not find evidence that operating leverage would have a significant effect on the dividend payout ratio of firms. Overall, my findings show that operating leverage is an important determinant of financial policies and it helps explain why many firms follow a conservative financial policy.
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