Modified degree of operating leverage risk measure

David Y. Aharon, Yoram Kroll and Sivan Riff

Finance Research Letters, 2023, vol. 51, issue C

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.

Keywords: Operating leverage; FCF; Idiosyncratic risk; Non-well-diversified investors; Risk-return efficient frontier; COVID-19 (search for similar items in EconPapers)
JEL-codes: D24 G39 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322006699

DOI: 10.1016/j.frl.2022.103493

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