The effect of financial leverage in determining business risk

Abstract

This survey was focused on the investigation of the concept of the corporate trade-off hypothesis (CTH), which suggests that firms adjust business risk and financial leverage to obtain the desirable amount of total systematic risk. We included in our survey textile manufacturing companies with total assets more than 100 million drs and a number of employees greater than
30. 370 textile manufacturing companies, satisfied those restrictions for the period 1988 through 1993. From the statistical analysis we concluded that there is an inverse relationship between the variables of operating beta and mean debt ratio, the measures of operating risk and financial leverage, Consequently, the empirical findings corroborate that the corporate trade-off
hypothesis is operative, for the cluster of textile manufacturing companies.