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Modified degree of operating leverage risk measure

Author

Listed:
  • Aharon, David Y.
  • Kroll, Yoram
  • Riff, Sivan

Abstract

Unlike the conventional Degree of Operating Leverage (DOL), we propose a modified DOL measure (MDOL) that considers both the exogenous shock to the demand function, and the volatility of the firm's asset as part of the idiosyncratic risk. Our model indicates that at times of turbulence such as the COVID-19 pandemic, global and local financial crises , MDOL can be much larger than the conventional DOL. The model supports the contention according to which, non-well diversified investors, who are commonly found in family firms, tend to underinvest to reduce their exposure to idiosyncratic risk.

Suggested Citation

  • Aharon, David Y. & Kroll, Yoram & Riff, Sivan, 2023. "Modified degree of operating leverage risk measure," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322006699
    DOI: 10.1016/j.frl.2022.103493
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    References listed on IDEAS

    as
    1. Amit Goyal & Pedro Santa‐Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, vol. 58(3), pages 975-1007, June.
    2. David Newton & Imants Paeglis, 2019. "Do Large Blockholders Reduce Risk?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 31(1), pages 95-112, March.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Sarkar, Sudipto, 2018. "Optimal DOL (degree of operating leverage) with investment and production flexibility," International Journal of Production Economics, Elsevier, vol. 202(C), pages 172-181.
    5. repec:bla:jfinan:v:58:y:2003:i:3:p:1301-1327 is not listed on IDEAS
    6. Ronald C. Anderson & David M. Reeb, 2003. "Founding‐Family Ownership and Firm Performance: Evidence from the S&P 500," Journal of Finance, American Finance Association, vol. 58(3), pages 1301-1328, June.
    7. repec:bla:jfinan:v:58:y:2003:i:3:p:975-1008 is not listed on IDEAS
    8. Lev, Baruch, 1974. "On the Association between Operating Leverage and Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(4), pages 627-641, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Operating leverage; FCF; Idiosyncratic risk; Non-well-diversified investors; Risk-return efficient frontier; COVID-19;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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