Leverage composition - A study of the relation between financial and operating leverage in Swedish public companies

Sammanfattning: This paper empirically examines the tradeoff hypothesis which suggests that firms should want to adapt their financial leverage depending on their operating leverage in order to maintain the overall leverage on an appropriate level. Data on 117 firms in the Swedish market during the years 2000 to 2009 was analyzed using two regression models. The findings confirm a negative relation between the two leverage components and thereby support the tradeoff hypothesis. Furthermore, the results provide evidence for that the relation between financial and operating leverage differs across industries, with manufacturing and retail companies having a more pronounced negative tradeoff compared to service companies. The study also supports earlier suggestions that the measuring of the leverage components may have a significant impact on the results, which sheds some light on previous conducted research's inability to establish a relationship between financial and operating leverage.