Analyzing the Impact of Operating Leverage on Sustainable Performance in Japanese Firms Using Contingency Theory

ABSTRACT Globally, corporations are grappling with the dual challenge of maintaining financial stability amid rising fixed costs and meeting growing stakeholder demands for sustainability. In response, many companies are adopting more sustainable business practices. The Corporate Governance Code of Japan, which emphasizes transparency and aligns with sustainable governance principles, offers a robust framework for effective corporate oversight. This study investigates the impact of operating leverage on sustainable performance as well as how market competition and firm size moderate this relationship, focusing on firms listed on the Tokyo Stock Exchange. Using purposive sampling with defined inclusion and exclusion criteria, data were collected from 328 non‐financial firms over a 23‐year period (2002–2024). Pre‐estimation diagnostics revealed cross‐sectional dependence and heterogeneous slopes, prompting the use of advanced estimation methods—specifically, the Augmented Mean Group (AMG) estimator and fixed effects with Driscoll‐Kraay standard errors. The findings indicate that operating leverage has a significant positive effect on sustainable performance. Moreover, firm size and market competition positively and significantly moderate this relationship. These results underscore the strategic importance of aligning operating leverage decisions with long‐term sustainability goals. Corporate managers are encouraged to consider increasing fixed investments in areas such as green technologies, energy‐efficient operations, and sustainable supply chains. Such investments not only advance sustainability commitments but also offer long‐term benefits through cost savings and enhanced corporate reputation.