I would like to measure the impact of corporate governance practices impact on risk management.so i have decided to measure the risk by using DOP and DFL. Are these measures okay?
If you understand systematic risk in the sense of the CAPM, systematic risk is always relative to market movements. A separation of Beta in three components shows that DOL and DFL are indeed just instruments that are levering the original risk to run a business in the way that your customers are buying your products - a line of reasoning (at least) since Rubinstein, JoF 1973, pp. 167, 178. This risk is systematic in the sense of a correlation with the market return (or another market wide parameter) while DOL and DFL are just levering ist. I published a paper in German on this that I can send to you on demand.
DOL measures the amount of business risk ( systematic) inherent in the nature of business. As you know it is a function of proportion of fixed costs in the total costs of the firm. In other words it is one of the parameters that determine the "asset beta " of the firm or the total risk of the firm equity if it was unlevered. On the other hand DOL which is a function of the D/E ratio determines , how this business risk is concentrated on the existing equityholders , if the firm was partially financed by debt. I dont think DOL or DFL per se are good proxies for risk. Asset beta is the proxy for business risk of the firm while equity beta can proxy the risk of the equity of the firm.
Our paper shows how to decompose market beta for financial leverage and operating leverage. The remaining beta is industry beta.
Dondeti, V. Reddy, Carl B. McGowan, Jr. and Susan E. Moeller. “Computing Bottom-up Betas for Companies in the Soft Drink Industry,” Journal of Business Case Studies, Fourth Quarter 2014, Volume 10, Number 4, pp. 357-362.
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