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THE EFFECT OF THE FIRM'S CAPITAL STRUCTURE ON THE SYSTEMATIC RISK OF COMMON STOCKS

THE EFFECT OF THE FIRM'S CAPITAL STRUCTURE ON THE SYSTEMATIC RISK OF COMMON STOCKS ONLYRECENTLY has there been an interest in relating the issues historically associated with corporation finance to those historically associated with investment and portfolio analyses. I n fact, rigorous theoretical attempts in this direction were made only since the capital asset pricing model of Sharpe [ 131, Lintner [ 6 ] , and Mossin [ll], itself an extension of the Markowitz [7] portfolio theory. This study is one of the first empirical works consciously attempting to show and test the relationships between the two fields. In addition, differences in the observed systematic or nondiversifiable risk of common stocks, P, have never really been analyzed before by investigating some of the underlying differences in the firms. I n the capital asset pricing model, it was demonstrated that the efficient set of portfolios to any individual investor will always be some combination of lending at the risk-free rate and the “market portfolio,” or borrowing at the riskfree rate and the “market portfolio.” At the same time, the Modigliani and Miller (MM) propositions [9, 101 on the effect of corporate leverage are well known to the students of corporation finance. In order for their propositions to hold, personal leverage is required to http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

THE EFFECT OF THE FIRM'S CAPITAL STRUCTURE ON THE SYSTEMATIC RISK OF COMMON STOCKS

Hamada, Robert S.
The Journal of Finance , Volume 27 (2) – May 1, 1972
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References (13)

Publisher
Wiley
Copyright
1972 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1972.tb00971.x
Publisher site
See Article on Publisher Site

Abstract

ONLYRECENTLY has there been an interest in relating the issues historically associated with corporation finance to those historically associated with investment and portfolio analyses. I n fact, rigorous theoretical attempts in this direction were made only since the capital asset pricing model of Sharpe [ 131, Lintner [ 6 ] , and Mossin [ll], itself an extension of the Markowitz [7] portfolio theory. This study is one of the first empirical works consciously attempting to show and test the relationships between the two fields. In addition, differences in the observed systematic or nondiversifiable risk of common stocks, P, have never really been analyzed before by investigating some of the underlying differences in the firms. I n the capital asset pricing model, it was demonstrated that the efficient set of portfolios to any individual investor will always be some combination of lending at the risk-free rate and the “market portfolio,” or borrowing at the riskfree rate and the “market portfolio.” At the same time, the Modigliani and Miller (MM) propositions [9, 101 on the effect of corporate leverage are well known to the students of corporation finance. In order for their propositions to hold, personal leverage is required to

Journal

The Journal of Finance – Wiley

Published: May 1, 1972

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