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Contraction flexibility, operating leverage, and financial leverage

Journal of management science and engineering (Online), 2020-03, Vol.5 (1), p.43-56 [Peer Reviewed Journal]

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Title:
Contraction flexibility, operating leverage, and financial leverage
Author: Li, Zhun ; Li, Qiang ; Zeng, Yong
Subjects: Agency conflict ; Contraction flexibility ; Financial leverage ; Operating leverage
Is Part Of: Journal of management science and engineering (Online), 2020-03, Vol.5 (1), p.43-56
Description: This study investigates the impacts of contraction flexibility and operating leverage on financial leverage from the perspective of the agency conflict between shareholders and debtholders. In a continuous-time real option framework, we demonstrate that shareholders’ contraction flexibility may have an adverse effect on financial leverage, and that the substitution relation between operating leverage and financial leverage is persistent or pronounced in the presence of contraction flexibility. The evidence from Chinese listed firms not only supports our theoretical predictions well, but also offers a method to examine the agency conflict hypothesis. We suggest that the high proportion of bank loans or long-term debt in total liabilities can help levered firms alleviate the agency problem arising from contraction decisions.
Publisher: Elsevier B.V
Language: English
Identifier: ISSN: 2096-2320
EISSN: 2589-5532
DOI: 10.1016/j.jmse.2020.02.002
Source: DOAJ Directory of Open Access Journals

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