Operating leverage and profitability of SMEs: agri-food industry in Europe

• Published in: Small business economics Vol. 57; no. 1; pp. 221 - 242
• Main Authors: Grau, Alfredo, Reig, Araceli
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-06-2021; Springer Nature B.V
• Subjects: Business and Management; Competitiveness; Debt; Entrepreneurship; Food processing industry; Industrial Organization; Innovations; Leverage; Management; Microeconomics; Operating leverage; Panel data; Profitability; Small & medium sized enterprises-SME; Europe; Innovation and specificity; L26; Operating leverage; G31; Europe; G32; M20; Return on assets
• ISSN: 0921-898X; 1573-0913
• DOI: 10.1007/s11187-019-00294-y

The objective of this paper is to analyse the effect that operating leverage exerts on the profitability of SMEs, both in isolation and indirectly through its other determinants. We use panel data from a total of 9652 European agri-food SMEs from 2009 to 2016. The work’s principal contribution is the study of the SMEs of a key sector of the European economy in terms of the cost structure, since this is an issue that directly affects the competitiveness of firms, but which has not garnered sufficient attention in the literature. It also considers the importance of the institutional and legal environment on the risk assumed by companies. The results obtained confirm that operating leverage or cost structure, in addition to affecting profitability, also affects the relationship between that profitability and other sources of risk that depend on the country in which the company operates. More specifically, indebtedness, size, innovation specificity and reputation all affect profitability to a greater or lesser extent, depending on the level of operating leverage of the company.