Empirical Measurement of Operating Leverage for Growing Firms

O’Brien, Thomas J.; Vanderheiden, Paul A.

doi:10.2307/3666003

Cited by 67 publications

(55 citation statements)

References 7 publications

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“…Again, irrespective of the absurdity of the value for DOL, it points to the direction that DOL positively impacts operating risk measured in terms of the absolute variability of PBIT of emerging companies. Secondly, the positive effect of CM on operating risk is in discordance with theoretical studies of Gahlon and Stevens (1975), Gahlon and Gentry (1982) and O'brien and Paul (1987), that is as CM increases, operating risk will normally follow a particular trend, linear or curvilinear but not significant fluctuation in the short term. So, on account of the results above, it is inferred that factors other than variable cost might be responsible for rising operating risk.…”

Section: Resultsmentioning

confidence: 73%

Degree of Operating Leverage, Contribution Margin and the Risk-Return Profile of Emerging Companies: Evidence from Nigeria

Dagogo¹

2014

IJEF

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This article investigates the effects of degree of operating leverage and contribution margin on profitability and risk of Nigeria's emerging companies. Emerging companies were described in this study as small and medium-sized enterprises that are high-potential and high-growth in character listed in the Nigerian Stock Exchange's Alternative Investment Market. Cross-sectional and time series data were collected from Nigerian Stock Exchange for the top ten emerging companies listed in the market. Additional restricted-access data about internal management accounting decisions were retrieved directly from these firms. Data were sought to estimate values for operating profit, operating risk, degree of operating leverage, and contribution margin. Since data were collected for ten years in each case, a ten-by-ten panel study involving two models was designed. The probability of both f-test and t-test was 0.05. First, the study shows that degree of operating leverage (DOL) contributes less to profit before interest and tax (PBIT) of emerging companies than contribution margin (CM), yet DOL contributes more to their operating risk profile than CM does. Second, only CM was found to have caused significantly positive changes in operating risk. It was, therefore, concluded that emerging companies face challenges in recovering fixed costs or take unusually longer period to breakeven.

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Section: Resultsmentioning

confidence: 73%

Degree of Operating Leverage, Contribution Margin and the Risk-Return Profile of Emerging Companies: Evidence from Nigeria

Dagogo¹

2014

IJEF

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“…In a later study, O'Brien and Vanderheiden (1987) suggest that the time-series estimates of DOL proposed by Mandelker and Rhee suffer from a construct validity problem. If unit sales are systematically rising, the time-series estimates of DOL are proxying for growth rather than operating leverage.…”

Section: (7)mentioning

confidence: 95%

Properties of time‐series estimates of degree of leverage measures

Lord

1998

The Financial Review

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Empirical studies suggest that time-series regression estimates of the degrees of operating and financial leverage have a tendency to produce measures less than one. According to ex ante theory, these measures should be greater than one for firms operating above the breakeven point. There have also been suggestions that the biases in these estimates may be attributable to an underlying increase in unit sales. This work presents evidence that these counter-intuitive measures are produced by changes in the firm's operating parameters (unit price, variable cost, fixed cost and interest payments). It further suggests that attempts to control for the underlying change in unit sales substantially increase the volatility of predicted estimates.

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“…Following Mandelker and Rhee (1984), O'Brien and Vanderheiden (1987), Dugan and Shriver (1992) and Lord (1998), DeYoung and Roland use a two-stage time series regression approach to obtain an estimate of each bank's earnings sensitivity to changes in revenue. In the first stage each credit union's quarterly total revenue and earnings is de-trended and de-seasonalised by regressing the profit and revenue series on a (cubic) time trend, T, and the first, second and third quarter dummy variables, Q1, Q2 and Q3:…”

Section: The Degree Of Total Leverage Modelmentioning

confidence: 99%