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

Abstract

There is much diversity in the approaches used to estimate the degree of operating leverage in empirical financial research. Two techniques for the estimation of the degree of operating leverage coefficients are analyzed and compared using a sample of 245 firms in 7 different industries over 2 alternative estimation periods. The results indicate that the O'Brien and Vanderheiden (1987) estimation technique differs significantly from the Mandelker and Rhee (1984) 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.