Product market competition and operating leverage: International evidence*

Abstract

This study examines the association between product market competition (PMC) and operating leverage for a large sample of international firms from 46 countries spanning the period 1985–2019. Using the Herfindahl-Hirschman (HH) index and the Industry Adjusted Price Cost Margin (IPCM) as two proxies for PMC, we provide evidence that PMC is significantly and positively associated with the operating leverage of firms. Cross-sectional analyses reveal that investment intensity, firm life cycle and the country-level employment protection legislation moderate the relationship between PMC and operating leverage. This study contributes to the scarce literature on the determinants of operating leverage. We expect our findings to be informative for investors in understanding the role market competition plays in shaping cost structures.