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The impact of operating and financial risk on equity risk

The impact of operating and financial risk on equity risk This paper empirically investigates a complete theoretical model relating the operating characteristics of a firm to the total, systematic, and unsystematic risk of its equity. The degree of operating leverage, the ratio of net profits to firm value, and the variability of unit output are all found to be positively correlated with each of the three risk measures. The degree of financial leverage, while positively related to total and unsystematic risk, does not appear to be related to systematic risk. After controlling for the business risk of the firm, no evidence can be found of an interaction between the degree of operating leverage and the degree of financial leverage. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics and Finance Springer Journals

The impact of operating and financial risk on equity risk

Journal of Economics and Finance , Volume 20 (3) – Jun 20, 2008

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References (25)

Publisher
Springer Journals
Copyright
Copyright
Subject
Economics; Economics, general; Macroeconomics/Monetary Economics//Financial Economics; Finance, general
ISSN
1055-0925
eISSN
1938-9744
DOI
10.1007/BF02920604
Publisher site
See Article on Publisher Site

Abstract

This paper empirically investigates a complete theoretical model relating the operating characteristics of a firm to the total, systematic, and unsystematic risk of its equity. The degree of operating leverage, the ratio of net profits to firm value, and the variability of unit output are all found to be positively correlated with each of the three risk measures. The degree of financial leverage, while positively related to total and unsystematic risk, does not appear to be related to systematic risk. After controlling for the business risk of the firm, no evidence can be found of an interaction between the degree of operating leverage and the degree of financial leverage.

Journal

Journal of Economics and FinanceSpringer Journals

Published: Jun 20, 2008

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