The Impact of the Operating Leverage and Financial Leverage on the Firm’s Value: Empirical Evidence from Pakistan

Abstract

Purpose: The main objective of this study is to analyze the impact of operating leverage and financial leverage on the firm’s value based on data of firms listed in Karachi Stock Exchange (KSE).

Design/Methodology/Approach: To analyze the impact of leverage on the firm’s value, Panel Data from 2005 to 2009 is employed by using regression technique.

Findings: The regression results reveal that there is significant impact of Degree of Operating Leverage (DOL) and Degree of Financial Leverage (DFL) on the firm’s value. The findings are consistent with the studies observed in the literature.

Originality/Value: Since both Degree of Operating Leverage and Degree of Financial Leverage are measures of Business risk and Financial risk, their presence may significantly affect firm’s value. Therefore, the main value of this paper is to provide the comprehensive understanding of sources of risk and their impact on the firm’s value.

Keywords: Degree of Operating Leverage (DOL), Degree of Financial Leverage (DFL), Firm Value

JEL Classification: G10, G11