An empirical investigation of the inter-relationships between systematic risk, financial leverage and operating leverage of industrial companies listed on the Johannesburg Stock Exchange

Troughton, Mark Timothy

An empirical investigation of the inter-relationships between systematic risk, financial leverage and operating leverage of industrial companies listed on the Johannesburg Stock Exchange

Master Thesis

1996

Publisher

University of Cape Town

Department

College of Accounting

Faculty

Faculty of Commerce

Abstract

The Capital Asset Pricing Model (CAPM) postulates that beta is a quantitative measure of a company's undiversifiable risk, the determinants of which are of considerable interest to financial managers and investors alike. Analytical research has shown that beta is a positive function of a company's unlevered or asset beta and its market value debt to equity ratio (i.e. financial leverage). In turn, unlevered beta has been shown to be a positive function of a company's operating leverage, and the trade-off between operating and financial leverage proposed as a means of stabilising beta. The objective of this research was to empirically determine the nature of the relationships · between: beta and financial leverage; beta and operating leverage; and financial and operating leverage. A significant level of positive association was hypothesised between beta and both financial and operating leverage, while a significant negative association was hypothesised between financial leverage and operating leverage.

Description

Bibliography: pages 234-247.

Keywords

Financial Management

Reference:

Collections

Masters

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