Optimal DOL (degree of operating leverage) with investment and production flexibility

The purpose of this paper is to derive the optimal DOL (degree of operating leverage) of a company with flexibility in investment and production. The choice of DOL is a critical one because it impacts the company’s risk level, operating and financial performance, and valuation. However, there is virtually no research on how a company should choose its DOL. We address this gap in the literature, using a real-option model that incorporates …