Reply to Linnenluecke, Shen, Smith, and Zhu (2020)
RIS ID
143938
Abstract
When the firm changes its operating leverage it becomes a different firm with a different payoff distribution from its operations. Its CAPM market value can therefore be higher or lower, as can its cost of capital. Its market value is not independent of its operating leverage in the way that its firm value is independent (under MM) of its debt to equity financing ratio. Changes in debt to equity do not affect the firm’s operations, whereas changes in operating leverage are designed to do exactly that.
Publication Details
Johnstone, D. (2020). Reply to Linnenluecke, Shen, Smith, and Zhu (2020). Abacus: a journal of accounting, finance and business studies, 56 (2), 292-294.