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 return 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.

Citation

Chen, H., Jory, S.R., Mishra, T. and Ngo, T. (2024), "Firms’ cost structure and stock return volatility", Managerial Finance, Vol. 50 No. 12, pp. 2047-2070. https://doi.org/10.1108/MF-01-2020-0005