What explains the value premium? The case of adjustment costs, operating leverage and financial leverage

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    Abstract

    This paper empirically examines and compares the different theoretical predictions on how adjustment costs, operating and financial leverage influence the value premium. Consistent with Ozdagli (2012), financial leverage plays a dominant role, supported by adjustment costs (which represent the degree of investment irreversibility). Specifically, the observed value premium is driven by the financial leverage differences between value and growth firms, partially neutralized by investment irreversibility. The relation between the value premium and investment irreversibility is contrary to the intuition in Zhang (2005) and Cooper (2006). Operating leverage does not significantly influence the value premium.
    Original languageEnglish
    Pages (from-to)350 - 366
    Number of pages17
    JournalJournal of Banking and Finance
    Volume59
    DOIs
    Publication statusPublished - 2015

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