Market Power, Growth, Leverage and the Valuation of the Firm*

Growth Stocks and Corporate Capital Structure Theory

“…By means of a slightly modified version of the traditional model, it has been established in [15], [16], [12] that a dynamic market‐leverage hypothesis of the form (cf. (9) above), …”

“…Section I provides a brief introduction to the relevant literature. In Section II, some earlier results (contained in [15], [16], [12]) are succinctly discussed along with new results and recent insights: If the financial leverage variable defining a linear form of the levered equity capitalization rate is specified in terms of book values as MM's critics do, the propositions are inconsistent; interestingly, moreover, such a hypothesis leads to a counterintuitive result that the value of the levered growth firm may be less than that of the unlevered growth firm—raising questions concerning the relevance of book measures of financial leverage in the theoretical and empirical investigation of the effect of capital structure on the firm valuation. To be sure, when the financial leverage variable is specified in terms of market values—the appropriate concept under the MM theory—the inconsistency of the propositions still obtains with a naive application of the traditional model, except for one special case of constant growth to perpetuity.…”