Abstract
This paper investigates and models the relationship between firm value and risk. In order to model the impact of operating and financial leverages and intrinsic business risk on firm value we extend both the theoretical and empirical issues of Mandelker and Rhee (1984) and Chung (1989). We use panel data to estimate operating and financial leverage degrees and 403 sample non-financial USA firms for the period from 1995 to 1999. Our empirical findings suggest that the degree of operating leverage and intrinsic business risk explain a large portion of the variation of excess return in dollar when firm's sales are negatively correlated with the market portfolio. In contrast, when firm's sales are positively correlated with market portfolio, the degree of operating leverage is embedded in the intrinsic business risk and a significant portion of cross-sectional variation in the excess return in dollar can be explained by intrinsic business risk and the degree of financial leverage.
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