The operating leverage impact on systematic risk within a context of choice: An analysis of the US trucking industry

Abstract

Purpose

Strategic cost structure choices determine how firms divide operating costs between fixed and variable components, and therefore have important implications for financial performance. The purpose of this paper is to examine the effect of operating leverage on equity Betas when managers have discretion over firms' cost structures.

Design/methodology/approach

Using panel data for publicly listed trucking firms over years 1994‐2006, market model Betas are regressed on controls and alternatively measured proxies for operating leverage: degree of operating leverage, assets in place and percentage of company employed drivers.

Findings

Results of this study generally show positively significant coefficients on all three operating leverage variables.

Originality/value

Operating characteristics of many industries require that firms make substantial investments in long‐lived assets that result in high fixed costs (e.g. depreciation), and for these firms cost structure is exogenously or technologically constrained leaving managers with little discretion. In contrast to these types of firms, the authors examine the effect of operating leverage (OL) on Betas when managers have discretion over firms' cost structures. Trucking firms are a particularly interesting industry group for analyzing the impact of operating OL choices on Beta because distinct strategic cost structure choices are available to the management of trucking firms that result in various degrees of OL throughout the industry.

Citation

Houmes, R.E., MacArthur, J.B. and Stranahan, H. (2012), "The operating leverage impact on systematic risk within a context of choice: An analysis of the US trucking industry", Managerial Finance, Vol. 38 No. 12, pp. 1184-1202. https://doi.org/10.1108/03074351211271283