Effect of operating leverage on stock price crash risk: Evidence from China

This study examines how operating leverage (i.e., firms’ reliance on fixed costs) affects stock price crash risk. Although leverage is known to magnify earnings volatility, its link to crash risk remains underexplored. Using data from Chinese-listed firms from 2007 to 2021, we show that high operating leverage raises crash risk by 5.5 %–6.9 %. The effect arises through two channels: investors overestimate growth potential while overlooking vulnerabilities, and managers delay bad-news disclosure. These risks intensify under high investor sentiment, speculative trading, and low transparency, but are mitigated by stable sales and long-term capital. Employing two-stage least squares, difference-in-differences, entropy balancing, and system generalized method of moments, we establish a robust causal link. The results highlight the need to consider operating leverage, alongside financial leverage, in assessing market fragility and shaping stability policies.