An additional analysis of estimation techniques for the degree of financial leverage

This study compares three different empirical proxies for the financial leverage component of a systematic risk‐composition model employed in prior financial research. We consider one static accounting measure and two elasticity‐based measures. We find that the traditional static accounting measure of financial leverage provides statistically different estimates of financial leverage when compared to estimates from elasticity‐based measures of the degree of financial leverage. The findings are important because the elasticity‐based models for the degree of financial leverage have clear theoretical links to market‐based models of systematic risk, while the static accounting measure of financial leverage does not. Practitioners and researchers should carefully consider why they are estimating financial leverage and choose the appropriate method for doing so given the goals and potential consequences for biased estimation.     

An Empirical Comparison of Alternative Methods for the Estimation of the Degree of Operating Leverage

Much diversity exists in the approaches used to estimate the degree of operating leverage in empirical financial research. This study analyzes and compares two techniques for the estimation of the degree of operating leverage coefficients for a sample of 245 firms in seven different industries over two alternative estimation periods. The results indicate that the O'Brien and Vanderheiden estimation technique differs significantly from the Mandelker and Rhee estimation technique. Furthermore, the O'Brien and Vanderheiden estimates appear to be more consistent with the classical ex ante model of degree of operating leverage coefficients. These results may facilitate future research on the estimation of the degree of operating leverage and on the relationship between operating leverage and systematic risk.     

Can Operating Leverage Be the Cause of the Value Premium?

Recent theoretical models (Carlson, Fisher, and Giammarino, 2004) predict an association between the book-to-market equity ratio (BE/ME) and operating leverage in the cross-section. Consistent with these models, we find a positive association between BE/ME and the degree of operating leverage (DOL), between DOL and stock returns, and between DOL and systematic risk. Overall, our findings provide support for a risk-based explanation for the value premium that is consistent with existing theoretical models. The evolution of systematic risk associated with firm-level investment activity, rather than financial distress, seems to be the main determinant of the value premium.     

Corporate social responsibility and degrees of operating and financial leverage

We examine the relationship between corporate social responsibility (CSR) and firms’ degrees of operating (DOL) and financial leverage (DFL). Combining the enlightened value maximizing and capital structure theories, we hypothesize that CSR as firms’ strategic choice to internalize the cost from implicit contracts between the firms and their non-investing stakeholders affects firms’ operating and financial leverage. We find empirical evidence that CSR and CSR strengths are positively (negatively) related to firms’ DOL (DFL). CSR concerns are positively related firms’ DOL and DFL. We also document that CSR is positively related to firms’ operating cost and we find evidence that CSR acts as a substitute for corporate debt tax shield when firms’ financial leverage is low.     

The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries

This paper examines the change in the financial and operating performance of 79 companies from 21 developing countries that experienced full or partial privatization during the period from 1980 to 1992. We use accounting performance measures adjusted for market effects in addition to unadjusted accounting performance measures. Both unadjusted and market-adjusted results show significant increases in profitability, operating efficiency, capital investment spending, output, employment level, and dividends. We also find a decline in leverage following privatization but this change is significant only for unadjusted leverage ratios. Our results are generally robust when we partition our data into various subsamples.     

IPO Failure Risk

We explore the factors associated with historical IPO failures by developing an IPO failure prediction model that includes accounting information as well as proxies for the role of information intermediaries and other IPO deal–related characteristics. We document statistically significant differences in failure models applicable to nontech versus high tech IPOs, and these structural differences are largely driven by accounting‐based proxies for firms' investments in intangible assets, operating performance, and financial leverage. We also develop parsimonious, predominantly accounting‐based, strictly out‐of‐sample (i.e., no hindsight) IPO failure forecasting models for each of the two sectors. We find that our forecasts are negatively associated with one‐year post‐IPO abnormal returns. A pseudo‐hedge strategy of going short (long) in high (low) failure risk portfolios yields returns of economically significant magnitudes over the one‐year horizon, and is robust to alternative returns methodologies. Further results suggest that IPO long‐run returns anomalies may persist, but they take different forms for high‐tech and nontech IPOs.     

Precision in Accounting Information, Financial Leverage and the Value of Equity

Abstract:  Using an equity valuation model characterized by periodic imperfect accounting information, we examine how financial leverage affects a firm's accounting quality choice (i.e., precision). We find that the existence of financial leverage motivates firms with average to good performance to prepare accounting information with a high degree of precision. However, we conclude that when a firm is performing poorly it has an incentive to reduce accounting precision in order to lower the likelihood of both a debt covenant violation and the detection of accounting bias.     

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 Determinants of Managerial Accounting Policy Choice: Further Evidence for the UK

This paper combines an accruals-based measure of accounting discretion with a multivariate modelling framework as a means of generating more appropriately specified tests of the determinants of managerial accounting policy choice. Findings suggest that smoothing considerations account for the majority of cross-sectional variation in the degree of accounting discretion. Evidence is also presented that managers employ accounting choices to (i) signal expected future cash flow performance and (ii) reduce the probability of debt covenant violation, as captured by the leverage ratio. However, the strength of the relation between leverage and accounting policy choice is shown to vary across the sample period, possibly reflecting changes in the probability of debt contract violation for the average sample firm over time. Limited evidence is also presented which suggests that the magnitude of the association between discretionary accruals activity and leverage, ownership, and smoothing may be conditional on prior-period accrual activity.     

Equity Risk and the Labor Stock: The Case of Union Contracts

This paper investigates the role of the stock of unionized labor in determining equity investment risk. I estimate a labor stock measure based on expected compensation costs, and use the ratio of labor stock to total assets as a risk proxy. At the median, the labor stock is comparable in magnitude to total assets. Regression estimates show the associations between labor-based risk proxies and equity market risk measures are both economically and statistically significant. In addition, the labor-based measures provide risk information over and above information contained in standard risk proxies such as financial and operating leverage.     

Predicting systematic risk: Implications from growth options

In accordance with the well-known financial leverage effect, decreases in stock prices cause an increase in the levered equity beta for a given unlevered beta. However, as growth options are more volatile and have higher risk than assets in place, a price decrease may decrease the unlevered equity beta via an operating leverage effect. This is because price decreases are associated with a proportionately higher loss in growth options than in assets in place. Most of the existing literature focuses on the financial leverage effect: This paper examines both effects. We show, with a simple option pricing model, the opposing effects at work when the firm is a portfolio of assets in place and growth options. Our empirical results show that, contrary to common belief, the operating leverage effect largely dominates the financial leverage effect, even for initially highly levered firms with presumably few growth options. We then link variations in betas to measurable firm characteristics that proxy for the fraction of the firm invested in growth options. We show that these proxies jointly predict a large fraction of future cross-sectional differences in betas. These results have important implications on the predictability of equity betas, hence on empirical asset pricing and on portfolio optimization that controls for systematic risk.     

Empires of the sky: determinants of global airlines' accounting-policy choices

This study quantifies the current level of diversity observed in airline accounting and examines possible determinants that explain accounting-policy choices by the global airline industry. Airlines' accounting-measurement policy for unrealized foreign-exchange differences and their disclosure of frequent-flyer information remains diverse. Inferential statistics shows that larger airlines tend to take unrealized foreign-exchange differences directly to equity and tend to disclose frequent-flyer accounting policy, while airlines with lower leverage tend to disclose frequent-flyer accounting.     

Are target leverage ratios stable? Investigating the impact of corporate asset restructuring

If firms balance the benefits and costs of leverage, then we might expect corporate asset shocks to trigger a change in corporate target leverage. We investigate the impact of corporate asset restructuring and find that target leverage after restructuring is reduced for downsizing firms and increased for upsizing firms. Changes in target leverage are stabilized by the second year after the restructuring event and are monotonic relative to the degree of restructuring. Decomposition analysis shows that corporate asset restructuring directly and significantly affects target debt ratios. Compared to control firms, downsizing firms adjust claims by repurchasing debt while upsizing firms issue debt securities. As expected, debt repurchases are associated with lower tax liabilities while debt issuance decisions correspond to lower growth proxies and are consistent with a higher adverse selection cost of issuing equity, positive leverage deficit, higher tax liabilities, and lower bankruptcy risk.     

Historical market-to-book in a partial adjustment model of leverage

Historical market-to-book has been shown to explain current leverage. Prior studies attribute the evidence to market timing. This study shows that with the presence of time-varying targets and adjustment costs, historical market-to-book has a significant impact on leverage even when firms do not time the market. The historical values of alternative market timing proxies, such as insider sales and the market sentiment index, are shown to have no effects on leverage while the historical values of alternative growth-option proxies do have effects. Overall, the evidence is largely consistent with a partial adjustment model of leverage.     

Property Segment and REIT Capital Structure

This paper relies on an increasing number of industry equilibrium studies linking a firm to its industry peers to help explain the observed REIT capital structure variation within property segments beyond what is possible with the traditional partial equilibrium trade-off and pecking order theories, which assume that each firm operates in isolation from other market participants and are not particularly suitable to REITs because of the regulated setting within which these firms operate. We build several proxies for a REIT’s position within its property segment. Consistent with the competitive equilibrium model of Maksimovic and Zechner (1991), we find that a REIT’s volatility of operating performance relative to the median volatility of operating performance of its segment peers is an important determinant of its leverage ratio. We also find that a REIT’s leverage ratio depends on the median leverage ratio in its segment. Leverage is also related to a REIT’s status as an incumbent and its role as a leader in the property segment.     

财务管理中的杠杆效应与风险探析

财务管理学中的经营杠杆、财务杠杆和复合杠杆相关理论是企业优化资本结构、获取经营杠杆收益、控制经营风险、实现股东收益最大化与控制企业财务风险的重要理论,涉及筹资活动、投资活动与经营活动多个方面,是筹资决策、投资决策和经营决策的重要依据。本论从经营杠杆、财务杠杆相关理论依据与内涵入手,在分析经营杠杆、财务杠杆和复合杠杆计算及公式的基础上,重点对其三项指标的性质与作用进行分析与评价。以达到全面的、正确的理解杠杆效应与风险程度的相互关系,明晰经营风险和财务风险之间的联系,以实现经营(投资)决策与筹资决策的相互配合,共同控制与降低企业复合风险。     

Taxes, Leverage, and the Cost of Equity Capital

We examine the associations among leverage, corporate and investor level taxes, and the firm's implied cost of equity capital. Expanding on Modigliani and Miller [1958, 1963] , the cost of equity capital can be expressed as a function of leverage and corporate and investor level taxes. Based on this expression, we predict that the cost of equity is increasing in leverage, and that corporate taxes mitigate this leverage‐related risk premium, while the personal tax disadvantage of debt increases this premium. We empirically test these predictions using implied cost of equity estimates and proxies for the firm's corporate tax rate and the personal tax disadvantage of debt. Our results suggest that the equity risk premium associated with leverage is decreasing in the corporate tax benefit from debt. We find some evidence that the equity risk premium from leverage is increasing in the personal tax penalty associated with debt.     

A Comparison of Between‐Country Measures of Legal Setting and Enforcement of Accounting Standards

Academics and practitioners agree that the enforcement of accounting standards has an important role in promoting high quality financial reporting and favourable capital market outcomes. We test three new enforcement proxies from Brown, Preiato and Tarca (2014) that focus specifically on auditing and accounting enforcement. We examine firms’ information environments, represented by the error in analysts’ consensus forecasts and the extent of disagreement among analysts, as indicated by forecast dispersion. For financial years ending from 2003 to 2009, we construct a sample of 357,034 firm–month observations on the errors and dispersion of analysts’ earnings forecasts for 10,769 firms domiciled in those 39 countries. We find that higher scores for all three proxies are associated with lower error and less disagreement in forecasts. In addition, we find that the indices have significant explanatory power when previously used enforcement proxies (such as Kaufmann et al.'s 2010 rule of law measure) are included in the regression models, pointing to the importance of specific measures of accounting enforcement. We conclude that accounting enforcement may be more important in securing favourable economic outcomes than has been previously realised, because researchers commonly have used noisier, more general legal proxies for enforcement that understate its marginal effects.     

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.     

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.