A re-examination of the operating leverage-financial leverage tradeoff hypothesis

The "tradeoff" hypothesis states that firms trade off their operating leverage and financial leverage to manage their level of overall risk. The objective of this study is to examine whether firms that exhibit a relatively high degree of apparent tradeoff differ in financial attributes from firms that exhibit a relatively low degree of apparent tradeoff. The empirical results provide evidence that the two types of firms differ significantly with respect to certain financial attributes (ratios), though the results are sensitive to the choice of estimation technique for calculating the degree of operating leverage and degree of financial leverage coefficients.