Management Accounting Section Midyear Meeting

The Change in Operating Leverage Over Time and Earnings Properties

• In Event: Operating leverage

Abstract

This paper presents a bridge between the managerial accounting literature and the financial accounting literature by documenting that firms substituted variable costs with fixed costs over the last three decades due to changes in the competitive environment in the United Stated. Using a sample of US firms from 1958 to 2017 in both time-series and panel regression specifications, we find that operating leverage (i.e., the ratio between fixed and variable costs) has significantly increased, on average, about three fold, in the 30 years from 1988 till 2017, while operating leverage was stable beforehand. This study is the first to document a substitution between variable and fixed costs in a large sample over a long period, suggesting a significant change in resource consumption patterns in the US economy. We find a significant effect of operating leverage on earnings volatility, cash flow volatility, frequency of losses, and ERCs. This study is the first to document that significant changes to earnings properties are induced by changes in firms’ cost structures over time, which reflect changes in resource consumption, above and beyond changes in accounting standards.

Authors

• David Aboody, UCLA

• Shai Levi, Tel Aviv University

• Dan Weiss, Tel Aviv University