Firms’ cost structure and stock return volatility

Abstract

Purpose: This paper proposes a framework to identify a pattern in the relationship between firms’ cost structure (i.e., fixed versus variable) and their volatility in stock returns.
Design/methodology/approach: Our empirical analysis is based on a panel data regression where we use an extended sample period and a time-series regression-based elasticity measure of operating leverage.
Findings: We document significantly higher systematic risk among firms with large fixed costs, a conclusion which confirms theoretical predictions of earlier studies. In new findings, we document high firm- specific risk, and high stock returns volatility among firms with a fixed cost structure.
Originality/value: The paper fills a gap in the literature by examining the effect of cost structure using various operating leverage measures and other control measures for firm characteristics on idiosyncratic risk. Studies that seek to explain firms’ systematic risks are numerous; conversely, there are relatively fewer studies on the determinants of firms’ specific risks.

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Identifiers

ORCID for Surendranath Jory: orcid.org/0000-0002-8265-0001

ORCID for Tapas Mishra: orcid.org/0000-0002-6902-2326

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