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Abstract
Firm operating leverage is a well-known determinant of risk and return. However, this relationship is not straightforward. In theory, firms with greater operating leverage are expected to have greater risk, but recent literature has suggested that the level of scale flexibility, or the ability of a firm to adjust to changing productivity, plays a role in determining the strength of the positive relationship between operating leverage and risk. Combining methods from previous literature, this study leverages international data to further explore the effect of firm inflexibility on risk. Furthermore, this study investigates possible factors that make certain firms more flexible than others by examining cross-country differences in several candidate drivers of inflexibility. The results suggest that the relationship between scale flexibility and risk holds in the international sample, and differences in institutional environments across countries may have an effect on average firm inflexibility.