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AN INDEPENDENCE OF THE asset and liability composition of the firm is implied in much modern financial theory; the independence of investing and financing decisions is a prominent part of Modigliani and Miller's classic capital structure research. While the separation of financing and investing decisions is an invaluable assumption which greatly simplifies many corporate financial decisions, the actual balance sheets of modern corporations do not exhibit an independence between the two sides of the balance sheet. The purposes of this paper are (1) to identify relationships between the two sides of the balance sheet exhibited by these corporations and (2) to explain the nature of these relationships.The independence of asset and liability composition is explicit in Modigliani and Miller's capital structure propositions [15]. In their 1958 article, they demonstrate that, given a stream of risky earnings, the total market value of the firm and cost of capital are independent of capital structure (M & M's Proposition I). Furthermore, the cutoff rate for an investment project is completely independent of the way an investment is financed (M & M's Proposition III), thus implying a complete separation between the investing and financing decisions of the firm.'The teaching of corporate finance, as reflected in the major textbooks, compartmentalizes the decision areas of finance and, within each compartment, management is assumed to attempt to maximize the firm's wealth, holding the other areas of the firm constant. For example, capital budgeting decisions are made given a cost of capital or required rate of return (a capital project is evaluated independent of how it is financed), or the capital structure is chosen given the character of the firm's assets. Cash, receivables, and inventory balances tend to be optimized independently. There is a tradeoff between the rigor afforded by global models of the firm (such as the CAPM) versus the realism afforded by 1 The separation theorem simply means that an individual's risk preferences are independent of the optimal portfolio of risky assets. In the Sharpe-Lintner capital asset pricing model [13,19], the individual's choice of assets and financing is dichotomized: first, the optimal combination of risky assets (where the capital market line is tangent to the efficiency frontier) is determined, and, second, the optimal amount of borrowing or lending at the risk free rate (where the capital market line is tangent to the individual's highest indifference curve) is chosen. In the capital asset pricing model, the combination of risky assets is independent of the individual's risk preferences and also dichotomized from the amount of borrowing/lending (leverage). Of course, if the borrowing rate had a nonzero correlation with the returns on at least one asset, the optimum mix of risky assets would be affected by the amount of borrowing. 974The Journal of Finance

This paper reports the results of a scientific survey of the equity valuation practices of CFA Institute members with equity analysis job responsibilities. Using an instrument designed to minimize biases in prior valuation surveys and sampling a larger group than in previous studies (13,500 investment professionals, resulting in 1,980 valid completed questionnaires), this paper documents professional practices in the selection of equity valuation approaches, including specific model variations and key input preferences. Important differences in practice were observed across geographies and employer firm types.

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