IDEAS home Printed from https://ideas.repec.org/a/eme/jfeppp/jfep-01-2018-0005.html
   My bibliography  Save this article

A reconsideration of operating-financial leverage tradeoff hypothesis

Author

Listed:
  • Michael T. Dugan
  • Simon K. Medcalfe
  • Sang Hyun Park

Abstract

Purpose - This paper aims to attempt to perform a test of the operating leverage-financial leverage tradeoff hypothesis that is more methodologically consistent with the logical framing of the hypothesis appearing in the Mandelker and Rhee (1984) paper. Design/methodology/approach - The paper uses a sample of firms from the manufacturing industry to estimate their degree of operating leverage and degree of financial leverage coefficients. The switching regression methodology is then used to perform the empirical test of the tradeoff hypothesis. Findings - The results suggest that firms tradeoff their operating and financial leverage during good economic times, but do not engage in the tradeoff behavior during recessionary times. Originality/value - This paper refines the empirical testing of the tradeoff hypothesis using the innovative switching regression methodology. The paper also has important implications for the impact of firms’ risk on the capital markets as well as the economy as a whole, and for academic researchers in financial economics examining the relationships between operating and financial leverage and various firm-specific variables.

Suggested Citation

  • Michael T. Dugan & Simon K. Medcalfe & Sang Hyun Park, 2018. "A reconsideration of operating-financial leverage tradeoff hypothesis," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 10(4), pages 473-483, September.
    • Handle: RePEc:eme:jfeppp:jfep-01-2018-0005
    DOI: 10.1108/JFEP-01-2018-0005
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/JFEP-01-2018-0005/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/JFEP-01-2018-0005/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1108/JFEP-01-2018-0005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:jfeppp:jfep-01-2018-0005. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.