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.