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An Empirical Comparison of Alternative Methods for the Estimation of the Degree of Operating Leverage

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  • Dugan, Michael T
  • Shriver, Keith A

Abstract

Much diversity exists in the approaches used to estimate the degree of operating leverage in empirical financial research. This study analyzes and compares two techniques for the estimation of the degree of operating leverage coefficients for a sample of 245 firms in seven different industries over two alternative estimation periods. The results indicate that the T. O'Brien and P. Vanderheiden (1987) estimation technique differs significantly from the G. Mandelker and S. Rhee (1984) estimation technique. Furthermore, the O'Brien and Vanderheiden estimates appear to be more consistent with the classical ex ante model of degree of operating leverage coefficients. These results may facilitate future research on the estimation of the degree of operating leverage and on the relationship between operating leverage and systematic risk. Copyright 1992 by MIT Press.

Suggested Citation

  • Dugan, Michael T & Shriver, Keith A, 1992. "An Empirical Comparison of Alternative Methods for the Estimation of the Degree of Operating Leverage," The Financial Review, Eastern Finance Association, vol. 27(2), pages 309-321, May.
    • Handle: RePEc:bla:finrev:v:27:y:1992:i:2:p:309-21
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    Cited by:

    1. Steven Stelk & Sang‐Hyun Park & Simon Medcalfe & Michael T. Dugan, 2018. "An additional analysis of estimation techniques for the degree of financial leverage," Review of Financial Economics, John Wiley & Sons, vol. 36(3), pages 220-231, July.
    2. Luis García‐Feijóo & Randy D. Jorgensen, 2010. "Can Operating Leverage Be the Cause of the Value Premium?," Financial Management, Financial Management Association International, vol. 39(3), pages 1127-1154, September.
    3. Tobias Schlueter & Soenke Sievers, 2014. "Determinants of market beta: the impacts of firm-specific accounting figures and market conditions," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 535-570, April.
    4. Kalinowski Sławomir & Puziak Marcin, 2018. "Does a Financial Crisis Affect Operating Risk? Evidence from Polish Listed Companies," Economics and Business Review, Sciendo, vol. 4(1), pages 64-85, April.
    5. Marco A. Paganini, 2019. "Potential and Real Operating Leverage," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(8), pages 138-138, August.
    6. Clark, Ephraim & Qiao, Zhuo, 2020. "The value premium puzzle, behavior versus risk: New evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 12-21.

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