The estimation of leverage coefficients in corporate finance research: a review of the literature

Abstract

Purpose The purpose of this paper is to provide a literature review of elasticity-based techniques for the estimation of the degree of operating leverage (DOL) and the degree of financial leverage (DFL) in empirical corporate finance research. Design/methodology/approach This paper describes the specific details of the estimation of DOL and DFL coefficients under both of the primary estimation techniques and documents the econometric properties of the estimates derived from each techniques. Findings There are tradeoffs between the two techniques, as each technique has both appealing and limiting features. Originality/value This paper indicates how each of the two techniques possesses limitations and suggests that future research should attempt to develop estimation techniques that overcome those limitations.