Combined Leverage and Stock Risk

Abstract

A firm's degree of total leverage commonly is considered to be the product of degrees of operating and financial leverage. Mandelker and Rhee's empirical evidence supports such a view. O'Brien and Vanderheiden question conventional leverage proxies and suggest the improved measures used here. Mandelker and Rhee do not test against a competing alternative. L. Huffman provides such an alternative. These results support Huffman's theory. Interactions between investment and financing can either increase or decrease the impact of leverage on stock risk. Combined leverage, estimated without regard to levels of its operating and financing components, better explains stock risk.

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