Operating leverage and corporate cash holdings: evidence from China

Abstract

ABSTRACT This study examines the effect of operating leverage on firms’ cash holdings. We find that operating leverage can effectively increase corporate cash holdings. This effect is more pronounced among the firms with higher operating risks and asset specificity, indicating that operating risks and adjustment costs are two critical channels through which operating leverage increases cash holdings. The positive effect of operating leverage on firm’s cash holdings is only significant among the firms whose sales revenue grows discontinuously and rejects the alternative explanation. Our further study identifies that operating leverage can enhance the positive effect of cash holdings on firm value.