What does the CAPM say about operating leverage?

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

*Corresponding author for this work

Research output: Contribution to journalComment/opinionpeer-review

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.

Original languageEnglish
Pages (from-to)288-291
Number of pages4
JournalAbacus
Volume56
Issue number2
DOIs
Publication statusPublished - 1 Jun 2020

Keywords

  • CAPM
  • Operating leverage
  • Real options
  • Value irrelevance

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