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• W2804972866 abstract "The purpose of this paper is to derive the optimal DOL (degree of operating leverage) of a company with flexibility in investment and production. The choice of DOL is a critical one because it impacts the company’s risk level, operating and financial performance, and valuation. However, there is virtually no research on how a company should choose its DOL. We address this gap in the literature, using a real-option model that incorporates important managerial flexibilities such as investment flexibility (to choose investment timing and capacity) and production flexibility (to change output level in response to demand-side changes). With a wide range of input parameter values, our model generates optimal DOL figures that are similar in magnitude to empirical estimates. We also identify the important determinants of DOL, such as costs (fixed cost, variable cost, and cost of capacity), demand characteristics (growth rate, volatility, and price-sensitivity), productivity of capital, and interest rate. How these inputs impact DOL depends on whether investment timing is exogenously specified or endogenously determined by the firm. Finally, capacity has been used in the literature as a measure of DOL, since capacity choice impacts DOL via fixed cost. However, we show that a number of other factors also affect DOL, and the relationship between capacity and DOL can be positive, negative, or non-monotonic. Thus, capacity is not a good proxy for DOL." @default.
• W2804972866 created "2018-06-01" @default.
• W2804972866 creator A5027943703 @default.
• W2804972866 date "2018-08-01" @default.
• W2804972866 modified "2023-09-24" @default.
• W2804972866 title "Optimal DOL (degree of operating leverage) with investment and production flexibility" @default.
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• W2804972866 doi "https://doi.org/10.1016/j.ijpe.2018.05.022" @default.
• W2804972866 hasPublicationYear "2018" @default.
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