The relationship between operating leverage and financial leverage

We model the relationship between operating and financial leverage. When operating leverage is exogenously specified, financial leverage is a monotonically decreasing function of operating leverage. When financial leverage is exogenously specified, operating leverage is initially increasing and subsequently decreasing in financial leverage. Finally, when both operating and financial leverage are chosen by the firm, they can be positively related, negatively related or unrelated, depending on which underlying parameter is driving the changes. Thus, operating leverage and financial leverage do not always behave as substitutes, as argued in the traditional literature. The relationship is complex, possibly non-monotonic and dependent on the circumstances; empirical tests need to take this reality into account.     

Properties of time-series estimates of degree of leverage measures

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.     

Employee representation and financial leverage

We analyze how direct employee voice affects financial leverage. German law mandates that firms’ supervisory boards consist of an equal number of employees’ and owners’ representatives. This requirement, however, applies only to firms with more than two thousand domestic employees. We exploit this discontinuity and the law’s introduction in 1976 for identification and find that direct employee power increases financial leverage. This is explained by a supply side effect: as banks’ interests are similar to those of employees, higher employee power reduces agency conflicts with debt providers, leading to better financing conditions. These findings reveal a novel mechanism of direct employee influence.     

What explains the value premium? The case of adjustment costs,operating leverage and financial leverage

This paper empirically examines and compares the different theoretical predictions on how adjustment costs, operating and financial leverage influence the value premium. Consistent with Ozdagli (2012), financial leverage plays a dominant role, supported by adjustment costs (which represent the degree of investment irreversibility). Specifically, the observed value premium is driven by the financial leverage differences between value and growth firms, partially neutralized by investment irreversibility. The relation between the value premium and investment irreversibility is contrary to the intuition in Zhang (2005) and Cooper (2006). Operating leverage does not significantly influence the value premium.     

A two-part fractional regression model for the financial leverage decisions of micro,small, medium and large firms

In this paper we examine the following two hypotheses, which traditional theories of capital structure are relatively silent about: (i) the determinants of financial leverage decisions are different for micro, small, medium and large firms; and (ii) the factors that determine whether or not a firm issues debt are different from those that determine how much debt it issues. Using a binary choice model to explain the probability of a firm raising debt and a fractional regression model to explain the relative amount of debt issued, we find strong support for both hypotheses. Confirming recent empirical evidence, we find also that, although larger firms are more likely to use debt, conditional on their having some debt, firm size is negatively related to the proportion of debt used by firms.     

促进东西部金融中心建设互动发挥金融的杠杆作用

建设上海国际金融中心和重庆长江上游地区金融中心是国家战略的充分体现。促进东西部金融中心建设互动,将不断提升我国金融支撑能力,促进区域统筹发展,增强金融业抗风险能力。本文对上海、重庆金融中心自身建设以及互动提出了针对性建议。     

Adjusted accounting beta,operating leverage and financial leverage as determinants of market beta: A synthesis and empirical evaluation

This article reexamines and synthesizes two streams of research dealing with the relationship between market beta and accounting risk measures. It is shown that, with some minor rearrangement the Mandelker and Rhee (1984) model can be shown to be as a decomposition of the familiar accounting beta (Beaver, Kettler and Scholes 1970) into operating leverage, financial leverage, and an adjusted accounting beta. The adjusted accounting beta can be further decomposed into productivity gains and the relative cyclical sensitivity of the accounting flows of the firm. Empirical estimates of this extension made using three accounting flow measures in addition to earnings show that the intrinsic business risk factor not identified in the original Mandelker and Rhee model is the most significant explanatory factor related to market beta.     

The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance

This study empirically investigates the effects of competitive intensity and business strategy on the relationship between financial leverage and the performance of firms. Based on a sample of US manufacturing firms, this study confirms the hypothesis that the cost of debt is higher for product differentiation firms than cost leadership firms. Furthermore, the results indicate that competitive intensity has a negative effect on the leverage-performance relationship, suggesting that competition acts as a substitute for debt in limiting manager's opportunistic behavior. These findings reinforce the need to consider moderating factors such as strategic choice and the environment in which a firm operates when investigating the effects of leverage on performance.     

Taming polysemous signals: The role of marketing intensity on the relationship between financial leverage and firm performance

This study traces the degree of integration and volatility spillover effect between the Pakistani and leading foreign stock markets by analyzing the Meteor shower hypothesis. Daily data are used from nine worldly equity markets (KSE 100, NIKKEI 225, HIS, S&P 500, NASDAQ 100, DOW JONES, GADXI, FTSE 350 and DFMGI) for the period of 2005 to 2014. First, we used the whole data set and after that we split data set into two subsets, First subset of data contains the era of global financial crisis of 2008 from 2005 to 2009 and Second subset is after global financial crisis time period from 2010 to 2014 (The global crisis prevailed till end of 2009). By following the Hamao et al. (1990) technique the univariate GARCH type models are employed to explore the dynamic linkages between Pakistani and leading foreign stock markets. The results from whole data set illustrate that there is mixed co‐movements between leading foreign stock markets and Pakistani stock market. The results from both subsets provide an evidence that there is a unidirectional mean and volatility spillover effect from S&P 500, NASDAQ 100, DJI and DFMGI to KSE 100. Also we found bidirectional spillover effect between DFMGI and KSE 100 from both subsets of data. We concluded that there is only one indirect linkage through which may the information transmitted to KSE 100. This linkage is developed due to the co‐movement among KSE 100, DFMGI and NASDAQ 100 in crisis period. This integration between these markets may provide a sign of indirect linkage. It also exhibits the volatility in Pakistan stock market returns is instigated through direct effects as well as indirect effects. Our study brings important conclusions for financial institutions, portfolio managers, market players and academician to diagnose the nature and level of linkages between the financial markets.     

The role of on- and off-balance-sheet leverage of banks in the late 2000s crisis

Extensive regulatory changes and technological advances have transformed banking systems to a great extent. Banks have reacted to the challenges posed by the new operating environment by creating new products and expanding their activities to some uncharted business areas. In this paper, we study how modern banking which gave birth to the off-balance-sheet leverage activities affected the risk profile of U.S. banks as well as the level of systemic risk before and after the onset of the late 2000s financial crisis. Towards this, we separate on- from off-balance-sheet leverage and capture the latter with different, yet complementary, measures which do not exist in the current literature. Special attention is paid on the deleveraging process that occurred in the banking market after the crisis erupted, which is an additional innovative feature of this study. Our findings reveal that leverage, both explicit and hidden off-the-balance-sheet, increases the individual risk of banking firms making them vulnerable to financial shocks. Reverse leverage, on the other hand, is beneficial for individual banks’ health, but is found to be harmful for financial stability. We also demonstrate that the banks which concentrate on traditional lines of business typically carry less risk compared to those involved with modern financial instruments.     

A comparative analysis of proxies for an optimal leverage ratio

Previous studies that test the tradeoff theory commonly use one of the following debt ratio measures to proxy for a firm's hypothesized optimal ratio: firm's time-series mean leverage, moving average leverage based on a firm's historical debt ratios, industry median leverage, and predicted leverage ratio based on cross-sectional regressions. We find that these alternative proxies yield results that are significantly different from each other. Further, regression results of models that use the optimum target leverage and the conclusions drawn from the findings are sensitive to the model's proxy. Of the proxies that are commonly used in the literature, the moving average debt measure exhibits characteristics that are most consistent with the theoretical optimal leverage ratio.     

An analysis of the literature on systemic financial risk: A survey

This article presents an analysis of the literature on systemic financial risk. To that end, we analyze and classify 266 articles that were published no later than September 2016 in the databases Scopus and Web of Knowledge; these articles were identified using the keywords “systemic risk”, “financial stability”, “financial”, “measure”, “indicator”, and “index”. They were evaluated based on 10 categories, namely, type of study, type of approach, object of study, method, spatial scope, temporal scope, context, focus, type of data used, and results. The analysis and classification of this literature made it possible to identify the remaining gaps in the literature on systemic risk; this contributes to a future research agenda on the topic. Moreover, the most influential articles in this field of research and the articles that compose the mainstream research on systemic financial risk were identified.     

An equilibrium approach to financial stability analysis: the Colombian case

This paper studies in detail the performance of a general equilibrium model of the financial system when applied to the case of Colombia. This model was designed following closely the work by Goodhart et al. (Ann Fin 2, 1–21, 2006b). The results suggest that the model performs satisfactorily, especially in the prediction of short-run trends (2 years). A shortcoming of the results is a slight overestimation of several trends in the medium to long-term. There is however room to progress, particularly in terms of the incorporation of idiosyncratic features of the Colombian financial system into the model.      

Individual financial risk tolerance and the global financial crisis

We investigate individual investors’ tolerance towards financial risk by focusing on changes associated with the global financial crisis (GFC) of 2007–2009. Financial risk tolerance (FRT) is analysed longitudinally controlling for demographic, socio‐economic and regional variations. In absolute terms, the change in FRT is small and contrasts with a popular view that risk tolerance is an elastic psychological state overly influenced by the pervading market conditions. Even in the presence of significant financial events, FRT tends to be a reasonably stable attribute in the shorter term but possibly influenced and reshaped by events more gradually over time.     

Private benefits of control and firm leverage: An analysis of Korean firms

This paper investigates the leverage choices of an entrenched controlling party. If debt effectively curbs the private benefits of control, the controlling shareholder is given incentives to avoid debt. Using estimates of the private benefits of control and financial statement data from selected Korean firms, we find that a controlling party with large private benefits tends to lower debt. This relationship was concentrated after the Asian financial crisis. However, before the crisis, firms that affiliated with Korean conglomerates, chaebols, used more debt as private benefits increased. A financial reform program triggered by the crisis seems to have actuated the disciplining role of debt. JEL Classification G32, G34     

The impact of the financial system’s structure on firms’ financial constraints

We estimate firms’ cash flow sensitivity of cash to empirically test how the financial system’s structure and level of development influence their financial constraints. For this purpose we merge Almeida et al.’s work, a path-breaking design for evaluating a firm’s financial constraints, with that of Levine, who paved the way for comparative analysis of financial systems around the world. We conjecture that a country’s financial system, both in terms of its structure and its level of development, should influence the cash flow sensitivity of cash of constrained firms but leave unconstrained firms unaffected. We test our hypothesis with a large international sample of 30,000 firm-years from 1989 to 2006. Our findings reveal that both the structure of the financial system and its level of development matter. Bank-based financial systems provide constrained firms with easier access to external financing.     

金融全球化进程中金融风险的防范与化解(英文)

在全球金融化的进程中,金融活动在全球范围内得到扩展和深化,同时每个金融主体也面临着不同程度的风险,很多因素都可能加强金融风险,其中包括人为因素和系统因素。而包括中国在内的发展中国家在抵御可能的风险方面能力较弱,所以我们更加需要采取正确并积极的方式来抵御金融风险。     

Macro-Networks: An application to euro area financial accounts

This paper develops a financial network, designated the “Macro-Network”, that depicts the connections between the main financial and non-financial sectors of the economy in the various financial instruments of the euro area. The Macro-Network comprises of linkages across financial and non-financial sectors in each country. These country-level sector networks are then connected by the cross-border links between the individual banking sectors. Using the Macro-Network to simulate financial shocks, we find that the propagation effects depend on the underlying network structure, which evolves over time. After the financial crisis, bilateral linkages contracted sharply, reflecting the surge in counterparty risk and the de-leveraging processes. Nonetheless, our analysis suggests that even after this process, vulnerabilities remained in the euro area financial system, while a more diversified portfolio of cross-border exposures might mitigate the shock effects. We identify sectors which are most relevant for the propagation of financial shocks in the Macro-Network.     

Financial distress,outside directors and corporate tax aggressiveness spanning the global financial crisis: An empirical analysis

We examine financial distress and tax aggressiveness spanning the global financial crisis (GFC) of 2008 and the impact of the interaction between board independence and firm-specific financial distress on tax aggressiveness. Our regression results show that both financial distress and the GFC are positively associated with tax aggressiveness. More importantly, we find that the positive association between financial distress and tax aggressiveness is magnified by the GFC. We also observe that the interaction between board independence and financial distress is positively associated with tax aggressiveness. Our results are robust to multiple measures of financial distress and tax aggressiveness.