What Does the CAPM Say About Operating Leverage?

Martina K. Linnenluecke, Tom Smith, Yun Shen, Yushu Zhu and Zini Liang

Abacus, 2020, vol. 56, issue 2, 288-291

Abstract: We examine the issue of operating leverage and firm value. Johnstone (2020), in this issue, questions existing results which indicate that higher operating leverage results in lower firm value. We agree with Johnstone (2020) that this result is to be questioned and present a number of arguments which indicate that operating leverage is irrelevant to the valuation of the firm in the context of the CAPM model.

Date: 2020
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