Modified degree of operating leverage risk measure

David Y. Aharon; Yoram Kroll; Sivan Riff

doi:10.1016/j.frl.2022.103493

Modified degree of operating leverage risk measure

David Y. Aharon, Yoram Kroll, Sivan Riff

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Article number	103493
Journal	Finance Research Letters
Volume	51
DOIs	https://doi.org/10.1016/j.frl.2022.103493
State	Published - Jan 2023
Externally published	Yes

Bibliographical note

Publisher Copyright:
© 2022 Elsevier Inc.

Keywords

COVID-19
FCF
Idiosyncratic risk
Non-well-diversified investors
Operating leverage
Risk-return efficient frontier

ASJC Scopus subject areas

Finance

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.frl.2022.103493

Cite this

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title = "Modified degree of operating leverage risk measure",

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.",

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AU - Aharon, David Y.

AU - Kroll, Yoram

AU - Riff, Sivan

PY - 2023/1

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N2 - 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.

AB - 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.

KW - COVID-19

KW - FCF

KW - Idiosyncratic risk

KW - Non-well-diversified investors

KW - Operating leverage

KW - Risk-return efficient frontier

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DO - 10.1016/j.frl.2022.103493

M3 - Article

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SN - 1544-6123

VL - 51

JO - Finance Research Letters

JF - Finance Research Letters

M1 - 103493

ER -

Modified degree of operating leverage risk measure

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

UN SDGs

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