The relationship between operating leverage and financial leverage Journal Articles

abstract

• AbstractWe model the relationship between operating and financial leverage. When operating leverage is exogenously specified, financial leverage is a monotonically decreasing function of operating leverage. When financial leverage is exogenously specified, operating leverage is initially increasing and subsequently decreasing in financial leverage. Finally, when both operating and financial leverage are chosen by the firm, they can be positively related, negatively related or unrelated, depending on which underlying parameter is driving the changes. Thus, operating leverage and financial leverage do not always behave as substitutes, as argued in the traditional literature. The relationship is complex, possibly non‐monotonic and dependent on the circumstances; empirical tests need to take this reality into account.

authors

• Sarkar, Sudipto

status

• published 

publication date

• April 2020

has subject area

• 1402 Applied Economics (FoR)
• 1501 Accounting, Auditing and Accountability (FoR)
• 1502 Banking, Finance and Investment (FoR)
• Accounting (Science Metrix)

published in

• Accounting and Finance  Journal

keywords

• Business & Economics
• Business, Finance
• CAPITAL STRUCTURE
• COSTS
• Contingent-claim model
• DECISIONS
• Degree of financial leverage
• Degree of operating leverage
• FIRM
• INVESTMENT
• OPTIONS
• Optimal capacity
• Optimal debt level
• REAL
• RISK
• Social Sciences

Digital Object Identifier (DOI)

• 10.1111/acfi.12374

start page

• 805

end page

• 826

volume

• 60

issue

• S1