Abstract:
The impact of accounting information on stock market has been one of the most studied
topics in the Accounting and Finance research literature. Most of the studies are aimed
at identifying in what ways and dimensions of the accounting information is effectively
relevant for the investors' decision making. When making decisions with the purpose of
maximizing wealth, investors take into account the impact of macro economic and firm
specific variables. But, most of the studies have focused on accounting information such as
Profitability, Earning per Share (EPS), Return on Capital Employed (ROCE) etc. The present
study draws an attention to another important accounting variable, Degree of Operating
Leverage (DOL) which is the relationship between Earning Before Interest and Tax (EBIT)
and Sales. Hence, this study was undertaken with the purpose of determining the impact
of the Degree of Operating Leverage on Stock Return in the Colombo Stock Exchange.
This research was based on data from manufacturing firms listed on the Colombo Stock
Exchange for the period of 2003 to 2007. The final sample contained 27 companies out
of 31 companies in the manufacturing sector. Empirical tests were performed to test the
hypothesis that the Degree of Operating Leverage has a positive impact on Stock Returns.
We find that there is not a positive and significant relationship between those two variables
as expected.
