What Does the CAPM Say About Operating Leverage?

Abstract

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