On the Relationship Between Operating Leverage and Financial Leverage：the Incentive-Signalling Approach

• Main Authors: Chih-cheng Chen, 陳志誠
• Other Authors: Keng-shen Chen
• Format: Others
• Language: zh-TW
• Published: 2004
• Online Access: http://ndltd.ncl.edu.tw/handle/20026385331062162039

碩士 === 朝陽科技大學 === 財務金融系碩士班 === 92 === This paper will discuss how manager uses the operating leverage as a signal to represent the firm’s true type, and the process of how to moderate the problem that finance with difficulty cause by information asymmetric. If manager learns the firm is of good type that the probability of growth demand he face is high, then manager will choose higher operating leverage as a signal to strive for lower cost of capital. On the contrary, if manager knows firm’s true type is bad, and then he cannot pretend himself as a good one because higher operating leverage is not affordable, therefore he has to choose lower operating leverage and thus bearing higher cost of capital, which reflected the higher risk. We found the relationship between operating leverage and financial leverage maybe positive, which means the trade-off point of view between operating leverage and financial leverage on the literalness may not hold.