Much has been written during the past decade to explain the relationship between financial and operating leverage and stock-price volatility. However, the relationship between combined leverage and stock-price volatility has yet to be fully explored. Mandelker and Rhee's (MR) recent study uses both operating and financial leverage in a regression (equivalent to the traditional total leverage—DTL) and shows that both types of leverage are positively associated with common stock betas. Huffman recently demonstrated that there are interactions between operating leverage and financial leverage. Therefore, MR's model could be oversimplified. This study examines the relationship between firms' combined leverage and their stock-price volatility. The study also examines industry and industry growth to see if the relationship is influenced by these factors. The question is whether DOCL is a better risk measure than DTL and whether there is an interaction between operating and financial leverage. The inferences that can be drawn from the study's results are as follows: (a) Stock risk is a function of combined leverage; (b) Industry significantly influences the relationship between stock risk and DOCL; (c) High growth increases the relationship between stock risk and DOCL; (d) Combined leverage (DOCL) is a better risk measure than total leverage (DTL). Further, the problem with the traditional total leverage measure is the omission of the interaction between DOL and DFL. This is consistent with Huffman's theory and suggests Mandelker and Rhee's model is oversimplified.
| Identifer | oai:union.ndltd.org:unt.edu/info:ark/67531/metadc331340 |
| Date | 08 1900 |
| Creators | Li, Rong-Jen |
| Contributors | Henderson, Glenn V., Jr., Kvanli, Alan, McDonald, James L. |
| Publisher | North Texas State University |
| Source Sets | University of North Texas |
| Language | English |
| Detected Language | English |
| Type | Thesis or Dissertation |
| Format | vi, 143 leaves : ill., Text |
| Rights | Public, Li, Rong-Jen, Copyright, Copyright is held by the author, unless otherwise noted. All rights reserved. |
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