Operating leverage: A critical analysis of the concept and the methods of measurement

Tadeusz Dudycz, Revista de Contabilidad - Spanish Accounting Review, forthcoming

44 Pages Posted: 12 May 2020 Last revised: 28 Nov 2022

See all articles by Tadeusz Dudycz

Tadeusz Dudycz

Wroclaw University of Science and Technology, Faculty of Management

Date Written: April 17, 2020

Abstract

Operating leverage is one of the more popular parameters used in management practice and scientific research. However, in the literature, there are many definitions and methods of measurement, which are additionally presented imprecisely in both textbooks and scientific publications. This results in a great deal of freedom among authors in the selection of measures for estimating operating leverage and the interpretation of the results, which has a negative impact on functionality for synthesis and theory building. Although some authors made such reservations clear as early as the 1980s, the situation has not changed. Using a three-step process of asking questions relating to how it looks, how it works, and how it compares to other “somethings”, the article conducts a critical analysis of the operational leverage measures used in recent publications and proposes to organize and refine the concept of operational leverage as leverage to increase value added and profit at a given output level using a trade-off mechanism between variable and fixed costs. Finally, the article suggests directions for future research and provides tips on how to incorporate the proposed concept of operating leverage into empirical research.

Keywords: Operating leverage, DOL, Financial leverage, DFL, Trade-off, Operating risk, Fixed costs, Cost structure

JEL Classification: G31, G32, M21, M41

Suggested Citation

Dudycz, Tadeusz, Operating leverage: A critical analysis of the concept and the methods of measurement (April 17, 2020). Tadeusz Dudycz, Revista de Contabilidad - Spanish Accounting Review, forthcoming, Available at SSRN: https://ssrn.com/abstract=3578189 or http://dx.doi.org/10.2139/ssrn.3578189

Tadeusz Dudycz (Contact Author)

Wroclaw University of Science and Technology, Faculty of Management ( email )

ul. Smoluchowskiego 25
Wroclaw, 50-372
Poland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
390
Abstract Views
1,377
Rank
139,076
PlumX Metrics