Title: Firms' operating leverage and external shocks: does economic policy uncertainty matter?

Authors: Taher Hamza; Zeineb Barka

Addresses: EM Normandie Business School, Metis Lab, 32, Rue Henri Barbusse, 92110 Clich, France; PRESTIGE Labo, IHEC-University of Carthage, Tunisia ' IHEC Carthage, University of Carthage, Tunisia; PRESTIGE Labo, IHEC-University of Carthage, Tunisia

Abstract: This paper investigates the association between operating leverage and economic policy uncertainty based on a sample of French listed firms over 2002-2021. We provide robust evidence that firms tend to lower their operating leverage when economic policy uncertainty increases. This result continues to hold after controlling for endogeneity and conducting a series of robustness tests. Based on the real options theory framework, our results imply that, in an uncertain economic environment, firms may be inclined to cancel or defer their risky investment projects to avoid sunk costs. Our cross-sectional tests further demonstrate that the influence of economic policy uncertainty on operating leverage is less prominent in firms with high profitability and investment intensity. These pieces of evidence contribute to the scarce literature on the exogenous determinants of operating leverage and have practical implications for both investors and regulators.

Keywords: economic policy uncertainty; operating leverage; firms profitability; investment intensity.

DOI: 10.1504/IJMFA.2025.142957

International Journal of Managerial and Financial Accounting, 2025 Vol.17 No.1, pp.36 - 56

Received: 08 Oct 2022
Accepted: 22 Sep 2023
Published online: 02 Dec 2024 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article