Operating Cost Flexibility and Implications for Stock Returns †

This study suggests a new measure for a firm’s operating cost flexibility. Flexible firms are less risky and, therefore, require lower stock returns. This analysis of 126,202 firm-year observations from the U.S. cross-section of stock returns finds that the new measure explains a negative significant rate of return. The new measure’s impact extends beyond that of operating leverage. In addition, the new measure’s impact is both statistically and economically significant, and it is sustainable for a variety of in-sample and out-of-sample robustness tests. The new findings are beneficial to researchers and practitioners alike.