Empirical Test Of The Roles Of Operating Leverage In Explaining Stock Expeceted Returns

Operating leverage stemming from fixed operating costs has important influence on stock expected returns by amplifying the systematic risk of assets-in-place.Meanwhile,the contract decisions on assets-in-place would alter the relative composition of firm assets and the level of operating leverage,and thus have the influence on the role of operating leverage in explaining stock expected returns.Moreover,with the effects of operating leverage on the relative magnitude of systematic risks of assets-in-place and growth options,the dynamic effect of the exercise of growth options on stock expected returns may be different from exisiting evidence.Based on the introduction of research background and literature review,this dissertation uses 2,416 A-share non-financial listed firms in Shanghai and Shenzhen Stock Exchanges during 1997 and 2014 as samples to examine how operating leverage affects stock expected returns under the framework of classic Fama-French Three-factor model.Taking contraction options embedded in assets-in-place and growth options into consideration,the further roles of operating leverage in explaining stock expected returns are examined.The result shows that operating leverage cannot act as a new pricing factor besides of Fama-French three factors,but it plays roles indirectly in explaning stock expected returns by moderating the effects of market Beta,market size(ME),book-to-market ratio(BE/ME)on stock expected returns.By incorporating the roles of contraction options embedded in assets-in-place and growth options,further tests give two findings.The first finding is that the positive moderating effect of operating leverage would be weakend when contraction options with negative beta are taken into account and that the moderating effect of operating leverage is more pronounced for firms with lower value of contraction options.Another finding is that the relative magnitude of systematic risks of assets-in-place and growth options would be ambigeous once if the amplification effect of operating leverage on the risk of assets-in-place is considered,and hence the negative effect of capital expenditure on stock expected returns is more pronounced especially for firms with lower operating leverage.