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This paper aims to attempt to perform a test of the operating leverage-financial leverage tradeoff hypothesis that is more methodologically consistent with the logical framing of the hypothesis appearing in the Mandelker and Rhee (1984) paper.

The paper uses a sample of firms from the manufacturing industry to estimate their degree of operating leverage and degree of financial leverage coefficients. The switching regression methodology is then used to perform the empirical test of the tradeoff hypothesis.

The results suggest that firms tradeoff their operating and financial leverage during good economic times, but do not engage in the tradeoff behavior during recessionary times.

This paper refines the empirical testing of the tradeoff hypothesis using the innovative switching regression methodology. The paper also has important implications for the impact of firms’ risk on the capital markets as well as the economy as a whole, and for academic researchers in financial economics examining the relationships between operating and financial leverage and various firm-specific variables.

The purpose of this paper is to provide a literature review of elasticity-based techniques for the estimation of the degree of operating leverage (DOL) and the degree of financial leverage (DFL) in empirical corporate finance research.

This paper describes the specific details of the estimation of DOL and DFL coefficients under both of the primary estimation techniques and documents the econometric properties of the estimates derived from each techniques.

There are tradeoffs between the two techniques, as each technique has both appealing and limiting features.

This paper indicates how each of the two techniques possesses limitations and suggests that future research should attempt to develop estimation techniques that overcome those limitations.

This paper aims to examine the association of accruals and disaggregated pension components with future cash flows and also to investigate whether investors distinguish between pension information that is recognized (SFAS 158) versus disclosed (SFAS 132).

Regression analysis is used with a proxy for expected future cash flows as the dependent variable, and the components of pension disclosures as well as controls for the 2008-2009 financial crisis as the independent variables.

The results reveal that incorporating disaggregated pension components increases the ability to predict future cash flows, and that investors attach different pricing multiples to the various components in the models. The authors also find that during the 2008-2009 financial crisis, the signs of the coefficients on these components changed. Finally, the results indicate that investors assign more significance to pension accounting information that is recognized, as opposed to disclosed, and that disclosure affects the allocation of pension assets.

The authors provide empirical support for the conjecture posited by Amir and Benartzi (1998) that the prediction of future cash flows will be enhanced by the incorporation of the components of pension assets and liabilities. Importantly from a standard setting perspective, the authors also find evidence that investors assign more significance to pension accounting information that is recognized in the financial statements than to pension information that is disclosed.

This study aims to examine the unexpected portion of the pension discount rate to determine if the pension discount rate is being used to manage earnings for both financially healthy and financially unhealthy firms as categorized based upon their Altman z-score for bankruptcy.

Regression analysis is conducted with the unexpected portion of the pension discount rate as the dependent variable and various metrics indicating potential firm strengths and weaknesses as the independent variables.

This study finds evidence that suggests managers for both groups of firms are using their choice of discount rate to manage bottom-line earnings. These findings highlight the patterns of various firm choice differences found between the two groups and the magnitude of the differences between the groups.

Three streams of literature are considered in this research: earnings management, defined pension plans and z-score bankruptcy. This study extends prior research by examining the unexpected portion of the pension discount rate based on the z-score determination of whether a firm is considered financially healthy or financially unhealthy. Our findings highlight the impact of various firm choice differences found between the two groups of firms.

This paper aims to identify the more accurate method of estimating a firm’s degree of operating leverage (DOL) between two popular DOL estimation techniques: that proposed by Mandelker and Rhee (M&R), and that proposed by O’Brien and Vanderheiden (O&V).

O’Brien and Vanderheiden argue that M&R measure growth in operating earnings relative to the growth in sales rather than DOL. The authors estimate the relative growth estimate, RGE, from the O&V technique (operating earnings growth rate/sales growth rate) and compare this with the DOL estimates from the M&R technique to see if they are similar.

The authors find that the DOL estimates from the M&R method are indistinguishable from the relative growth estimates from the O&V method, providing the first direct evidence that O&V’s critique is correct. The M&R DOL estimates primarily measure the growth in operating earnings relative to the growth in sales, not DOL.

A firm’s DOL is a determinant of its common stock’s systematic risk, which determines a firm’s equity cost of capital. The equity cost of capital is a fundamental part of capital budgeting, capital structure and stock price analysis. Accurately estimating a firm’s DOL is important to researchers and corporate financial managers. Existing diversity in DOL estimation techniques raises questions about the validity of various techniques and limits comparability of existing studies. This paper demonstrates why the O&V technique should be used in place of the M&R method.

The purpose of this paper is to examine the relationship of CEO compensation plans and the risk of managerial equity portfolios with the extent of strategic investments in advertising, capital expenditures and research and development (R&D). The elements of compensation are salary, bonuses, options and restricted stock grants. The authors proxy the design of CEO equity portfolios by the price performance sensitivity of the holdings and the portfolio deltas.

The authors use the components of executive compensation and portfolio risk as the dependent variables, regressing these against measures for the level of strategic investment. The authors test for non-linear relationships between the components of CEO compensation and strategic investments. The sample is a broad cross-section from 1992 to 2016.

The authors find strong support for non-linear relationships of capital expenditures and R&D with CEO bonuses, option grants and restricted stock grants. There are very complex relationships between the components of executive compensation and R&D expenditures, but little evidence of a relationship with advertising expenditures. The authors also find strong complex relationships in the design of CEO equity portfolios with advertising and R&D.

Little earlier research has considered advertising, capital expenditures and R&D in a unified framework. Also, testing for non-linear associations provides much greater insight into the relationship between the components of executive compensation and strategic investment. The findings represent a valuable incremental contribution to the executive compensation literature. The results also have normative policy implications for compensation committees’ design of optimal annual CEO compensation packages to incentivize or discourage particular strategic investment behavior.