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A History of Corporate Finance
This study focuses on the role of institutions and organizations in the development of corporate finance from the Italian merchant banks of the Renaissance through the formation of conglomerates and leveraged-buy-out partnerships in contemporary Wall Street. It also puts forth a compelling argument for the closer integration of historical and quantitative research methodologies in financial theory. The epilogue contains an original algorithm that explains the relationship between the short-term, firm-specific factors and longer-term environmental elements that have shaped the historical development of finance.
364 pages, Paperback
First published February 28, 1997
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Displaying 1 - 3 of 3 reviews
September 30, 2013
Essentially, corporate finance entails management's endeavor to solve two puzzles: 1) capital structure - how much debt finance a firm shall have?; 2) divident distribution - how much residual income shall be distributed to shareholders? This book responds to these two questions and illuminates historical evolutionin of the modern finance theory.
Thus, three main themes stand out in this book: evoluations of the modern theory of finance, the modern debt policy and the modern dividend policy. In my view, evolution is equivalent to innovation in the sense that they share the same consequenses bolstering business efficience. In history, there have been four general potential results from financial innovations: 1) possibility of economic of scale; 2) captured gain from exogenous events; 3) reduced risk perception; 4) improved market imperfections. In a reciprocal fashion, these results also pushed the evolution of finance theories. At the same time, however, one shall not forget that much of the evolutions could not have taken place unless advances in both statistics and date processing were made possible.
The former hypothesis defeated by later modern finance theory was the efficient market hypothesis, which asserts that due to the competitive nature of financial markets, the market is inherently efficient. However, this theory left many puzzles untouched. Specification of information used for stock evaluation was not addressed, and that how information was used in decision making was neglected. Later, the portfolio theory offered answers to some of these puzzles, as it stated that investors favor return and abhor risk and diversified portfolio can reduce overall risk.
What came next were of great significance in corporate finance history. In 1958, Franco Modigliani and Merton H. Miller published a seminal paper on optimal debt level, and in 1965, John Linter created the famous CAPM, which predicted a linear equilibrium relationship between risk and return. It has been widely adopted for equity valuation since then despite of constant debate about its assumption of perfect capital market and human behaviors. Today, CAPM and portfolio theories can be found in almost all college finance textbooks, unchanged and unchallenged. They are the fundamentals of modern finance theory.
For optimal capital structure, M & M (Modigliani and Miller) were the first to prove that shareholder equity was unaffected by capital structure changes.Later, they recognized that leverage can lift a firm value by taking deductible interest expenses and tax into consideration. In fact, there is a linear relationship between firm's value and amont of debt. In such circumstance, the more a frim borrows, the greater its value will be. In 1977, M&M incorporated taxes and bankrupcy costs into the formula. However, these models didn't actually explain difference in individual debt preference which often occured in practice.
M&M's work also shed light on divident policy. First, they established that value of a firm was indifferent to amont of divident distributed with the assumptions of perfect capital market and no taxes. But this theory failed to explain why some firm still pay dividents. The author supplemented that divdient distribution initially provided confidence in an imperfect market and overcame public reluctance to equity investment in the early years.
Throughout the book, various positions regarding modern finance theory were discussed. Even though the author admits in the book that these differences remain largely unsolved, this book's primary purpose is not to answer them, but to illustrate how they were confronted in the past.
Finally, the structure of this book can be summurized into three parts: Part I selective surveys of finance problems in preindustrilized world including merchant banks in later Middle Ages and Renaissance eras; Part II shifts focus to the era of industralization when industrial innovations accelerated financial innovations; Part III addresses the modern era discussing the lastest innovations in corporate finance - conglomerate firm and leveraged-buouts as well as post WWII manufacturers' resolutions to the corporate finance puzzles.
Due to a strong interest in corporate finance, i digested most of the content in this book but still left some for a hopefully future rediscovery.
Thus, three main themes stand out in this book: evoluations of the modern theory of finance, the modern debt policy and the modern dividend policy. In my view, evolution is equivalent to innovation in the sense that they share the same consequenses bolstering business efficience. In history, there have been four general potential results from financial innovations: 1) possibility of economic of scale; 2) captured gain from exogenous events; 3) reduced risk perception; 4) improved market imperfections. In a reciprocal fashion, these results also pushed the evolution of finance theories. At the same time, however, one shall not forget that much of the evolutions could not have taken place unless advances in both statistics and date processing were made possible.
The former hypothesis defeated by later modern finance theory was the efficient market hypothesis, which asserts that due to the competitive nature of financial markets, the market is inherently efficient. However, this theory left many puzzles untouched. Specification of information used for stock evaluation was not addressed, and that how information was used in decision making was neglected. Later, the portfolio theory offered answers to some of these puzzles, as it stated that investors favor return and abhor risk and diversified portfolio can reduce overall risk.
What came next were of great significance in corporate finance history. In 1958, Franco Modigliani and Merton H. Miller published a seminal paper on optimal debt level, and in 1965, John Linter created the famous CAPM, which predicted a linear equilibrium relationship between risk and return. It has been widely adopted for equity valuation since then despite of constant debate about its assumption of perfect capital market and human behaviors. Today, CAPM and portfolio theories can be found in almost all college finance textbooks, unchanged and unchallenged. They are the fundamentals of modern finance theory.
For optimal capital structure, M & M (Modigliani and Miller) were the first to prove that shareholder equity was unaffected by capital structure changes.Later, they recognized that leverage can lift a firm value by taking deductible interest expenses and tax into consideration. In fact, there is a linear relationship between firm's value and amont of debt. In such circumstance, the more a frim borrows, the greater its value will be. In 1977, M&M incorporated taxes and bankrupcy costs into the formula. However, these models didn't actually explain difference in individual debt preference which often occured in practice.
M&M's work also shed light on divident policy. First, they established that value of a firm was indifferent to amont of divident distributed with the assumptions of perfect capital market and no taxes. But this theory failed to explain why some firm still pay dividents. The author supplemented that divdient distribution initially provided confidence in an imperfect market and overcame public reluctance to equity investment in the early years.
Throughout the book, various positions regarding modern finance theory were discussed. Even though the author admits in the book that these differences remain largely unsolved, this book's primary purpose is not to answer them, but to illustrate how they were confronted in the past.
Finally, the structure of this book can be summurized into three parts: Part I selective surveys of finance problems in preindustrilized world including merchant banks in later Middle Ages and Renaissance eras; Part II shifts focus to the era of industralization when industrial innovations accelerated financial innovations; Part III addresses the modern era discussing the lastest innovations in corporate finance - conglomerate firm and leveraged-buouts as well as post WWII manufacturers' resolutions to the corporate finance puzzles.
Due to a strong interest in corporate finance, i digested most of the content in this book but still left some for a hopefully future rediscovery.
April 12, 2021
The book offers a holistic account of History of Finance with analytical implications that refer to the business needs, economic infrastructure, and financial supply triad. The book is quite successful in depicting the elements between 15th to mid 19th centuries. Yet, it seems especially the parts covering 20th century was rather dry and half-baked.
Did Not Finish
April 22, 2026Maybe later
Displaying 1 - 3 of 3 reviews