This finance course has two overarching goals
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The Aspen Institute Corporate Governance and Accountability Project:
Rethinking MBA Curriculum in the Finance Discipline
Supported by the Alfred P. Sloan Foundation
MBA Finance, Rethought:
Faculty at the Washington State University, Vancouver, MBA Program are rethinking the finance curriculum. As part of the Aspen Institute’s Corporate Governance and Accountability Project, WSU is working to reframe their core MBA Finance Course, “Problems in Financial Management” towards a more explicit treatment of stakeholders’ interests in financial managers’ decision making. The intention of this new course is to demonstrate to students that maximizing firm value necessitates focusing on more than shareholders.
For more about the philosophy behind this new course, see Professor Becker-Blease’s Case in Point essay, “Do Stakeholders Belong in Corporate Finance?”
It is the goal of the CGA Project to work with a select group of faculty partners to test drive this new and innovative course across the American business school landscape. The complete syllabus with teaching plans will soon be available at . Interested finance faculty should contact Alex.Roberts@ or jblease@vancouver.wsu.edu for more information.
On WSU’s Curriculum Reform Efforts:
John Becker-Blease, Finance Professor at WSU, is heading up this effort to reshape the finance syllabus. The MBA program at WSU emphasizes sustainable stakeholder engagement, where strategic stakeholder relationships form the foundation for long term organizational success. Each course in the MBA program uses this focus as a central organizing premise.
CGA in Brief::
Since 2003, The Aspen Institute Center for Business Education has received nearly $1,000,000 in funding from the Sloan Foundation to underwrite its Corporate Governance and Accountability Project (). The Project aims to influence prevailing models of corporate governance and theories of the firm, as they are understood and taught by business school faculty.
Problems in financial management
MBA-Level corporate finance course
Course Framework, Teaching Notes & Syllabus
Interactive Table of Contents
Strategic Stakeholder Engagement: Organizing Framework for WSU Vancouver MBA Program
Course Syllabus
Introduction and Overview of the course
Module Summaries
Course Information (description, objectives, grading, contact info, etc.)
Course Schedule
Module 1 Review Fundamental Microeconomics and Financial Management
Learning Goals
Readings
Additional Materials
Pedagogical Purpose and Notes
References
Module 2 Goal of the Corporation
Learning Goals;
Readings
Additional Materials
Pedagogical Purpose and Notes
Additional Talking Points
References
Module 3 Valuation
Learning Goals
Readings
Additional Materials
Pedagogical Purpose and Notes
Additional Talking Points
References
Module 4 Capital Structure
Learning Goals
Readings
Additional Materials
Pedagogical Purpose and Notes
Additional Talking Points
References
Module 5 Agency Theory & Governance
Learning Goals
Readings
Additional Materials
Pedagogical Purpose and Notes
Additional Talking Points
References
Module 6 Payout Policy
Learning Goals
Readings
Additional Materials
Pedagogical Purpose and Notes
Additional Talking Points
References
Module 7 M&A and Corporate Structure
Learning Goals
Readings
Additional Materials
Pedagogical Purpose and Notes
Additional Talking Points
References
Modules in Brief
Class Project
Complete Course References
Strategic Stakeholder Engagement: Organizing Framework for WSU Vancouver MBA Program
The finance course starts by reviewing the stakeholder approach the MBA program uses and how this course fits into that model. The model is presented on the next page. The model is first presented in a course on Stakeholders and Competitive Advantage that all students take as their first course in the MBA program. Here we start by reinforcing the key points:
• Organizational strategy is determined by:
⇨ The organization’s core values and views about how they want to operate.
⇨ Market conditions that determine where they can find a competitive niche.
⇨ Strategy is developed by applying theory from the key business disciplines: marketing, accounting, management, finance, and information systems.
• Resources are necessary to execute the strategy. Those resources that lead to a positional advantage are usually intangible and often relationship based. The organization develops a resource mix that is not imitable by competitors.
• Stakeholders (consumers, value chain partners, investors, employees, and publics) supply the resources. The organization must understand what motivates them to contribute to the organization. The organization must clearly understand what it needs from the stakeholders. Often there are conflicting expectations from different stakeholders which need to be balanced. Sometimes stakeholders may have relationships between themselves that affect how the organization works with them to assemble their resource mix.
Business leaders must orchestrate harmony between the goals and expectations for the organization and stakeholders. Often tensions arise around differing expectations. Good leadership anticipates these tensions and proactively crafts solutions. The MBA program curriculum is designed to develop talents for business leaders to think comprehensively when making decisions. For instance, theories presented in finance examine the impact on investors and also on other stakeholders such as employees or the public interest.
Washington State University Vancouver
Theoretical Framework for MBA Curriculum using a Strategic Stakeholder Engagement Focus
(See for a recording of the previous Web-Conference from WSU, Vancouver: Integrating Stakeholder Theory into the MBA Curriculum)
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Course Syllabus
Introduction and Overview
Teaching business ethics, always something of an embarrassment, may simply come to be teaching Finance well! (Stuart Greenbaum)
The purpose of this course is to provide students with a heightened appreciation of the role of a financial manager within a firm and to understand the tools and the nature of the decisions that financial managers must make. Paramount to the topic is an understanding of what constitutes a “good” manager. A traditional finance characterization of a good manager is one who adopts the most firm-value-maximizing projects in the interests of maximizing current shareholders’ wealth (e.g. Brealey, Myers, and Allen, pp 20-28). This model is sometimes called the shareholder primacy model. An alternative model, frequently termed the stakeholder model, argues that a good manager is one who effectively maximizes the joint utility of all firm-stakeholders.[1] A substantial literature has evolved highlighting the tensions between the two models. The goal of this course is to expose students to both of these models in the context of a traditional core-MBA finance class. The intent is for students to leave the course understanding in which situations the actions of stakeholder-focused managers and shareholder-focus managers will be the same and in which situations the actions could be different. In particular, students will appreciate that increased attention to the interests of all stakeholders is frequently essential to maximizing the long-term value of the firm and therefore current shareholder wealth.
First, I should place this course within the context of the MBA curriculum at Washington State University, Vancouver (WSUV). The MBA at WSUV is focused on the stakeholder model of the firm and there is only one graduate-level finance course offered. Given that students do not have alternative sources for topics such as capital structure, payout policy, practical capital budgeting issues, agency and governance issues, and the market for corporate control a substantial portion of this course is dedicated to the specifics of these topics. However, the lens through which we examine these topics includes a strong element of stakeholder interests in the effort to maximize firm value.
This course also reflects my understanding and interpretation of the stakeholder model, especially as it relates to shareholder primacy and firm-value maximization. I have found Michael Jensen’s “Maximization, Stakeholder Theory, and the Corporate Objective Function” particularly influential in this process. As a traditionally-trained financial economist, I have an undoubtedly biased view towards the shareholder primacy model and have likely sought out those elements of the stakeholder model that fit most seamlessly into the former. However, what appears evident is that in many, and likely most, situations in which a typical MBA student will find his or herself making an important decision, the correct application of the stakeholder and shareholder models will lead to a similar decision. Thus, at a practical level, my efforts are better placed in trying to equip students with superior tools with which to identify and analyze the economic effects of their decisions on various stakeholders rather than enter them into the important debate between the two theories.
Module 1 of the course is dedicated to review of the material most students would receive in an undergraduate-level introductory financial management course. These topics include time value of money, basic cash-flow-based asset valuation mechanics, an understanding of the relation between risk and reward based on the CAPM, estimation of project and firm-level cost of capital, and basic capital budgeting tools including NPV and IRR analysis. Student will also read the Graham and Harvey (2001) survey piece of CFOs, which provides an important reference piece throughout the course to map the contents of the course to actual practice.
Module 2 introduces students to the shareholder and stakeholder-focused models. Although students will have been exposed to both models in previous courses (they typically take the finance course during their second year in the program), they will likely not have seen a rigorous treatment of the shareholder primacy model. Within the context of perfect markets, I show that the shareholder primacy model and the stakeholder model lead managers to undertake identical actions. In particular, managers will maximize the value of the firm, which is equivalent to maximizing shareholders’ value, by optimizing the trade-offs among all stakeholders to create the highest long-term firm value, and this long-term value is accurately capitalized into the immediate share price.
However, as we introduce market imperfections, managers are presented with the opportunity to pursue not only self-interest but also to transfer wealth from one stakeholder to another. This issue persists even in the presence of nearly perfect contracting. Students are introduced, in a general sense, to why market imperfections leads to short-termism, or the focusing of managerial efforts towards short-term performance goals rather than long-term value.
Module 3 brings stakeholder tensions to the project level through capital budgeting decisions. Students are first introduced to a more complete picture of the capital budgeting process including estimation of cash flows, cost of capital, and incorporating the value of managerial flexibility through real options analysis. We then discuss the issue of externalities, how these are treated through the regulatory and external contracting process, and methods for managers to internalize these externalities in their analysis.
Module 4 covers capital structure. Students are presented with the two most widely covered theories in a traditional manner, although the module highlights the stakeholder impact of financial distress and the possible tension between shareholder and stakeholder preferences. For instance, the ease with which a labor force is reduced or implicit/explicit contracts with customers/suppliers/communities are renegotiated may encourage firms to carry more debt in an effort to maximize tax-shields than these stakeholders deem appropriate.
Module 5 reexamines the nature of agency conflicts within a firm and explores traditional methods for addressing those problems. These methods include compensation policy, internal monitoring via the board, and external monitoring via investors, particularly large investors. The external market for corporate control is covered later in the course. One important dimension of this module is to highlight the myriad of agency relationships that exist within a given firm. Another important dimension of this module is to reinforce how difficult it is to effectively monitor managers who have only a single objective function (value maximization), and the added difficulty imposed when other objectives are included. We will discuss mechanisms and potential innovations that might enable principals to better insure that agents are acting appropriately.
Module 6 covers payout policy. Although this topic is closely associated with capital structure, sequencing it after the agency module provides a good opportunity for students to really explore their understanding of the material to this point. That is, one can devise compelling rationales for the importance of payout policy based on asymmetric information as well as agency conflicts. Students should be able to largely derive the different theories of dividend policy based on a carefully directed classroom discussion and prior to reading much of the material. In addition, no readings are provided relating dividend policy to stakeholder theory. An interesting exercise is to have students examine the stakeholder implications, if any, of various payout policies.
Module 7 is the final module and a bit of a catch-all. In this module, we examine mergers and acquisitions with two different lenses. First, from essentially a capital-budgeting framework, we examine sound and less-sound economic rationales for acquisitions. We next focus more explicitly on so-called disciplinary takeovers, and their role in alleviating the agency conflict between managers and shareholders. We then discuss the rights and/or responsibilities of stakeholders, managers, and directors in mergers and acquisitions. Finally, firm diversification policy and director/manager entrenchment provide interesting examples of how the interests of managers and non-shareholder stakeholders can compete with apparent shareholder interests.
In addition to those included, the course also requires students to use the Brealey, Myers, and Allen (BMA) “Principles of Corporate Finance” textbook, which provides the bulk of the traditional academic component to each topic.
Washington State University
College of Business
Spring 2009
FIN 526
Problems in Financial Management
|Instructor Name |John R. Becker-Blease | |Meeting Times |W: 6:00-8:45 |
|Phone |360.546.9146 | |Location |VMMC 214 |
|Email |jblease@vancouver.wsu.edu | |Office |308N |
|Course Website |See below | |Office Hours |Tu 5:00-6:00 |
| | | | |and by appt. |
|Fax |360.546.9037 | |Support |360.645.9750 |
Course Description
The objective of this course is the application of finance theory and principles to the analysis of important business problems. Specific topics will include capital budgeting, cost of capital, real options, capital structure, payout policy, and enterprise valuation. The course is structured around the Enlightened Shareholder Model or Enlightened Stakeholder Theory. Students are assumed to have basic knowledge of the concepts of time value of money, valuation, capital budgeting, and cost of capital.
Course Objectives
1. Identify and critique normative theories of management’s role in the firm.
2. Conduct cash-flow and option-based valuation of real assets focusing on the long-term impact for all stakeholders.
3. Understand how capital structure, payout, and compensation policies, as well as the market for corporate control affect firm value and managerial actions.
4. Recognize the impact of agency conflicts and information asymmetries on firm performance and devise effective controls.
Course Materials
Textbooks:
• Principles of Corporate Finance, by Brealey, Myers, and Allen, McGraw-Hill/Irwin 8th ed. (BMA)
Other:
• Course e-packet (see below)
• Access to current business news either online or in print form
• Additional readings as assigned during the semester
• Calculator with log and exponential functions
• Access to computer for spreadsheet analysis
The course website will be the primary source of communication outside of the classroom and you should consult it on a regular basis. It can be accessed at
E-Packet
This course makes heavy use of academic articles and other forms of media. I will post on the course website a running list of readings as we progress through the course. No required reading will be posted with less than one week of lead time (typically two) and the readings will come primarily from the listed readings in the module (discussed below). I like to keep the exact list of required readings flexible to best tailor the coverage to the particular needs/interests of the class, as well as new developments in the field. Many of the articles will be familiar to you from other classes, but please plan to still read these again. In most cases, the readings are available through the library website or the Social Science Research Network (SSRN), and I will provide direct links if available. Cases are available from the HBS website. Other material will either be provided directly to you or information provided in a timely manner so that you can gain access to the material prior to class.
Although students can certainly economize on the collection process, to the greatest extent possible I encourage you to individually collect the articles as one of the reasons that I require you to retrieve the articles is to hone your search skills as well as expose you to other interesting papers found along the way.
The overall course is organized around 7 modules. Each module contains a brief description and learning goals, a list of readings, and other relevant material. Although the modules are separate, the best students will actively incorporate each new module into their cumulative knowledge of the course material. The characteristic that makes financial management most challenging is understanding how decisions made to affect one facet of a company can also affect many other facets.
Grading
Each student’s course grade will be calculated using the following weights:
Participation 20%
Firm Analysis Project 20%
Exams 60%
Participation
Class participation accounts for 20% of the student’s final grade. Participation is an amalgamation of attendance, meaningful contributions to class discussions, responses to cold-call questions, participation is case discussions, and completion of take-home assignments. My expectation is that each student will arrive to class having completely prepared the required material for the day. Please note that simply attending all classes and group meetings is not sufficient to earn full participation credit. In addition, “good” participation does not translate into dominating classroom discussions. A good participant facilitates discussion rather than monopolizes it.
Firm Analysis Project
Early in the semester, students will be asked to select a publicly traded firm to serve as a learning tool throughout the semester. At various points during the semester, typically corresponding with major topic sections, students will be given a set of information to gather and analyze related to their company, typically related to current course topics. Students will be expected to incorporate their firm’s experience into classroom discussions, which comprises an element of the participation grade, and to prepare a single, in-depth analysis of their firm to be submitted at the end of the semester.
Students should select their firm with an eye towards their eventual 702 project. The series of questions and assignments are designed to incorporate many of the topics of this course into a meaningful analysis, similar to what you will be asked to do for 702. Students are expected to submit formal and thoughtful responses and analyses to each of the assignments. Due dates will be announced when the assignments are distributed.
Exams
Both exams are cumulative and comprehensive and will be quite challenging. Exams will include both qualitative and quantitative elements. Exams are intended to explore the student’s ability to apply important concepts from the course in both familiar and unfamiliar situations. I do not provide formula sheets or allow outside resources (such as “cheat sheets” or open books) during exams, so students should prepare accordingly. The mid-term and final are each worth 30% of the student’s final grade.
Keys to Success
This course is, and is intended to be, quite challenging. If hearsay can be trusted, I have succeeded in my intent. Although no particular topic is particularly difficult, the pace and volume of material, as well as the cumulative nature of the learning, leads to a course that will require a steady, but hopefully not overly-burdensome, time-commitment. As graduate students, I expect each of you to be an active learner in that you will prepare as completely as possible for every meeting, come to class with questions and notes prepared, and will contribute to a dynamic classroom environment. Do not hesitate to seek additional help, as necessary. Although I do not have specific team-exercises incorporated into this class, I strongly encourage you to work in teams on assignments and in preparation for exams.
Recognize that this course contains important quantitative and qualitative elements. In most situations, quantitative questions have a single, “most correct” response, although the methods of determining this response may be varied. Performance on the qualitative elements of the course is frequently determined by a combination of knowledge and insightfulness as well as ability to clearly articulate an argument. Please carefully prepare any written responses as I can only evaluate what is written, not what you intended to write.
Contacting Me and Office Hours:
I currently have office hours planned for Wednesday from 5-6 PM. In addition, I have provided numbers where I may be reached. I typically check my email throughout the day and this is an excellent manner in which to contact me. Please note, I tend to be most favorably disposed to those students who come to office hours prepared (having read the chapters, attended lectures, and have well thought-out questions), in a timely manner (the material you are asking about has been lectured on within the past week), and asking for help, not charity (explaining a concept or examples, for instance, not asking about “what will be on the exam?” or “is this important?”).
Students with Disabilities
I am committed to providing all reasonable assistance to help each of you to be successful in this course. Reasonable accommodations are available for students with a documented disability. Please visit the Disability Resource Center (DRC) during the first two weeks of every semester to seek information or to qualify for accommodations. All accommodations must be approved through the DRC. Please ask the Associate Director of Student Services, in the Student Services Building (Room 203), to forward the appropriate documentation. Parents with potential child-care concerns should see me during the first week as well (i.e. due to snow-days, illness, etc.).
Academic Integrity
Your personal integrity is the foundation for your success and happiness in business and in life; you should treat it as your most valuable asset. Academic integrity is also the foundation of our institution’s reputation and success. I will pursue all suspected cases of academic dishonesty consistent with the policies of the College of Business and Washington State University. Academic dishonesty includes, but is not limited to: copying the work of others (or allowing others to copy your work) for exams, cases or assignments. I also consider it a violation of academic integrity for you to refer to case notes from students who previously took this course either at WSU or at another institution.
Academic Dishonesty – Students are expected to uphold the WSU standard of conduct relating to academic dishonesty (see WSU Student Handbook, WAC 504-25-015 as well as the Business Program Guidelines related to Academic Integrity). Students assume full responsibility for the content and integrity of the academic work they submit. The guiding principle of academic integrity shall be that a student’s submitted work, examinations, reports, and projects must be that student’s own work. Students shall be guilty of violating the honor code if they:
1. Represent the work of others as their own.
2. Use or obtain unauthorized assistance in any academic work.
3. Give unauthorized assistance to other students.
4. Modify, without instructor approval, an examination, paper, record or report for the purpose of obtaining additional credit.
5. Misrepresent the content of submitted work.
Consequences – Please note, these consequences are different than what you may have encountered in other classes so please read and understand them well. At a minimum, cheating or academic dishonesty of any form will result in a failing grade for this class, and may lead to your expulsion from the university. I do not have a policy of assigning a “zero” for the first infraction and taking more severe action on the second violation. Rather, the first incidence of cheating of any form will result in a failing grade. Please be aware that I take this issue very seriously and all incidences will be referred to the appropriate university administrator with my typical recommendation for dismissal from the university.
Student Conduct and Deportment
Per the WSU Vancouver Student Handbook, students are, “Expected to show due respect for …the rights of others.” For example, “While students have the right to freedom of expression…this expression cannot interfere with the rights of others or disrupt the processes of the University. Any malicious act which causes harm to any person’s physical or mental well being is prohibited.” Such activities include sexual harassment, discrimination, intimidation (e.g. bullying or belittling fellow students), disruptive behavior (e.g., loud talking in class, or slanderous comments made about other students or faculty (e.g., false and unsubstantiated claims of discrimination made for the purpose of improving grades). Students should be familiar with the Washington State University standards for student conduct presented in the WSU Vancouver student handbook (available from student services). “Students who fail to conduct themselves properly are subject to discipline, which may extend to temporary or permanent removal from the institution.”
Reporting Violations
Anyone wishing to report violations of the student or faculty conduct code should use the following procedures. Whenever possible, collect any documentation of the offending activity (e.g. written comments from other students or faculty, e-mail messages etc.). It is also useful for students to put their concerns in writing to faculty or administrators pursuing the matter can accurately convey the student’s concerns. Present the complaint and supporting documentation to the appropriate faculty member or administrator. The process should begin with the class instructor. If the instructor is unable to resolve the matter to the student’s satisfaction, of the problem behavior spans multiple classes, or if the nature of the problem makes this impossible, the complaint should be forwarded to the Program Director. If the matter is still not resolved to the student’s satisfaction, the complaint should proceed to the Associate Dean, then the Chancellor and finally to the University Ombudsman. See the WSU Vancouver student manual for more details concerning this process.
|Class Meeting |Topics |Learning |Module |Relevant Concepts and Theories |
|Date | |Objectives | | |
| | |Covered | | |
|1-9 |Course Introduction, Review of Valuation, |1 |1 | |
|1-16 |Role of the Firm, Goal of Management, and Enlightened Value |1 |2 |Shareholder Primacy/Stakeholder Theory |
| |Seeking and its Limitations. NPV/IRR/DCF analysis. | | |Enlightened Wealth Maximization |
|1-23 |Projecting TIFCF, Identification of priced and non-priced |1,2 |2 |Stakeholder Theory |
| |externalities. | | |Enlightened Wealth Maximization |
| |Evaluating “non-traditional” capital investments | | | |
|1-30 |Financial & Real Options |2 |3 |Binomial Option Pricing |
| | | | |Black-Scholes |
|2-5 |Real Option Identification & Valuation |2 |3 | |
|2-12 |Cost of Capital and Capital Structure |2,3 |3 |Miller & Modigliani (1958) |
| | | | |Capital Asset Pricing Model |
| | | | |Three-Factor Model |
| | | | |Arbitrage Pricing Theory |
|2-19 |Capital Structure |2,3,4 |4 |Static Trade-Off Theory |
| | | | |Information Asymmetry |
| | | | |Pecking Order Theory |
|2-26 |Corporate Governance, Agency Conflicts, and Managerial |1,3,4 |5 |Agency Theory |
| |Performance | | | |
| |Role of the Board | | | |
|3-5 |Mid-Term Exam (Full Session) | | | |
|3-12 |Spring Break (No Classes) | | | |
|3-19 |Compensation Policy |3,4 |5 |Agency Theory |
|3-26 |Payout Policy |2,3 |6 |Miller & Modigliani (1961) |
|4-2 |Corporate Structure |2,3 |7 |Economic Value Added |
| | | | |Market Value Added |
|4-9 |Diversification |2,4 |7 |Internal Capital Markets |
| | | | |Agency Conflicts |
|4-16 |Market for Corporate Control |2,4 |7 | |
|4-23 |Managerial Entrenchment & Review |2,4 |7 |Shareholder Interest Hypothesis |
| | | | |Managerial Entrenchment Hypothesis |
|4-28/5-2 |Final Exam | | |Date TBA |
Module 1: Review Fundamental Microeconomics and Financial Management
Learning Goals
• Review basic concepts of time value, project and firm valuation, capital budgeting, risk-reward, market efficiency.
• Review market structures, short and long-term equilibrium, competition, normal and excess profit, barriers to entry, monopolies and monopsonies.
Readings
a) BMA CHs 1-12. (review of intro finance course)
b) Goodwin, Neva. “The limitations of markets” Background essay”.
c) Graham and Harvey (2001) “The theory and practice of corporate finance: evidence from the field” (particularly pages 187-209).
Additional Materials
• Ken Freeman recording from HBS. We will revisit this example many times during the semester for different purposes. In this instance, we can highlight the fact that switching costs and the existence of a contract are barriers to entry that gave Corning the ability to make necessary changes. We can also discuss whether his assertion that the unit became profitable translates into only accounting profit or also economic profit, and how the existence of the barriers can help us to think about this.
Pedagogical Purpose and Notes
• This module may require a fair commitment of time, depending upon the level of preparation of the incoming students. Students will be notified several weeks before the start of classes that they need to review these chapters.
• Within the stakeholder framework, students not only need to recall the basic tools of financial management, but also need to solidify their understanding of the role that competitive structure plays in markets and the link between NPV and economic rents. In particular, it is useful to stress the importance of barriers to entry to achieving economic rents.
• The Goodwin article is the introduction to her CasePlace module and provides useful information for review of markets as well as an even-handed discussion of market-oriented behavior and market failures.
• The Graham and Harvey survey piece is a useful tool for helping students to appreciate the importance of the topics covered in the course. We will refer back to the statistics reported in this paper through the course. Paper also provides brief description of the theories underlying the tests. In this first module, students should be directed primarily towards pages 187-209. The capital structure section of the paper is read as part of the capital structure module.
References
• Goodwin, Neva. “The limitations of markets: Background essay” from .
• Graham, John R. and C.R. Harvey. 2001. “The theory and practice of corporate finance: evidence from the field” Journal of Financial Economics 60, 187-243.
Module 2: Goal of the Corporation
Learning Goals
• Describe the following models
o shareholder primacy
o stakeholder model
o balanced scorecard
o enlightened value maximization
o long-term value primacy
• Describe perfect market assumptions
• Long-term vs. Short-term view of the firm.
• Legal framework for managerial decision making.
Readings
• Winkler, Adam, “Corporate laws or the law of business?: Stakeholders and corporate governance at the end of history”.
• Stout, Lynn, 2002, “Bad and not-so-bad arguments for stakeholder primacy”.
• Clement (2005). The lessons from stakeholder theory for U.S. business leaders
• Barry, Norman, 2002. “The stakeholder concept of corporate control is illogical and impractical”.
• Jensen, Michael, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function”.
• Graham, Harvey, and Rajgopal (2006), “Value Destruction and Financial Reporting Decisions”
• Stout, Lynn. 2005, “New Thinking on “Shareholder Primacy”
• Bird, Ron, A.D. Hall, F. Momente, and F. Reggiani “What corporate social responsibility activities are valued by the market?”
• Useem and Badaracco “Managerial Duties and Business Law”
• Eisenberg, Melvin Aron, “Corporate conduct that does not maximize shareholder gain”
• Tirole, Jean, 2001. “Corporate Governance”
• Greenbaum, Stuart I., “Corporate governance and the reinvention of finance”.
Additional Materials
• Veridian Case: This provides an interesting example of stakeholder-aligned decision making and possibly suggests insights into how to make necessary tradeoffs. There is also an interesting parallel between this case and some of Stout’s comments that will help to not only solidify students’ understanding of the various models, but also potential weaknesses with each model (and his arguments in some instances). We return to this case in the last session of the course for a more formal analysis.
• Michael Jensen and Werner Erhard (2007) thoughts of “integrity” provides a useful framework for discussion. The positive casting of integrity can help to foster a discussion of the importance of positive vs. normative discussions and theories that are found throughout much of the reading.
• Mary Gentile’s teaching notes available at () can help to motivate a discussion on these issues. A large module addressing “What the Law Allows” is also available.
Pedagogical Purpose and Notes
• This is perhaps the most innovative module of the course. The purpose is to present various theories of managerial behavior and to discuss the various merits of each and ultimately provide compelling arguments that long-term value primacy or enlightened value maximization theories capture the best elements of each theory. An informative piece is Stuart Greenbaum’s speech to the Financial Intermediation Research Society, in which he discusses the pressures to transform finance curricula with an increased emphasis on ethics.
• It should also be stressed to students that none of these theories is complete in that each tries to simplify a set of actions consistent with maximizing interests in a very complex system. The premise of this course is that long-term value primacy, while also incomplete in that it does not give specific guidelines of how tradeoffs are to be made, is generally consistent with each of the other theories and provides a framework from which to improve and homogenize managerial goals.
• The Winkler piece provides an excellent starting point in that it provides a concise description of the evolution of law surrounding the shareholder-primacy and stakeholder views of the firm, or what he calls “corporate law” and the “law of business”. This piece provides good material to reference in the agency/governance and M&A modules of the course.
• I next discuss the Stout piece “Bad and Not-so-Bad Arguments for Shareholder Primacy”. Although written from a legal context, it provides very usable talking points on several common arguments for shareholder primacy (i.e. “shareholders as owners”, “shareholders as residual claimants”). She also makes the point that shareholder value can be increased through both wealth transfers and wealth creation. This allows for an interesting discussion of what we mean when we say “shareholders”, as shareholders with different horizons may have very different interests, and the interests of majority and minority shareholders can often conflict. We return to this discussion later in the course with another Stout piece “The Mythical Benefits of Shareholder Control”.
• The Clement article provides a useful synthesis of stakeholder-focused research and discusses the legal basis for corporations to include stakeholders’ interests in their decision-making. This discussion can also be augmented with the Useem and Badaracco article that very clearly lays out managerial duties within business law. Similarly, D&O fiduciary duties are discussed in HBS Reading 9-304-064.
• We then transition to discussing some of the weaknesses of the stakeholder model. In particular, the Barry article provides a very cogent description of the multiple objective function problem inherent with stakeholderism. He shows how the collective choice procedure described by Arrow can easily collapse under majority rule rather than the inherent dictatorship of shareholder primacy. This reading can be augmented with the Tirole article, which may be a bit beyond some MBA students, but nonetheless provides an interesting read and shows how lack of pledgeable income, deadlocks in decision making, and lack of a clear mission for management impede the effectiveness of the stakeholder model.
• Finally, we transition into what I call “long-term value primacy”, which is essentially the argument that firms “should” be managed to maximize long-term value (or the value for long-term shareholders). In order to achieve this end, managers must be cognizant of the impact that their decisions will have on various stakeholders, and importantly stakeholders’ response to these decisions, but that maximizing the value of the left-hand-side of the balance sheet gives a clear objective function. This is the point of the Jensen article “Value Maximization, Stakeholder Theory, and the Corporate Objective Function”.
• The Graham, Harvey, and Rajgopal (2006) article “Value Destruction and Financial Reporting Decisions” is the next article we discuss. It is an easy read and based on survey results, so is quite accessible to all MBAs. The authors find that CFOs acknowledge a fairly pervasive pattern of sacrificing long-term value for short-term performance. Although the results will not be too surprising to many students, this article offers several interesting insights and examples that are useful later in the course. In particular it highlights the role of information asymmetry in affecting managerial actions and shareholder myopia. Interestingly, one important reason for managing earnings was to “assure stakeholders business is stable”.
• We then conclude with a discussion of the Bird, Hall, Momente’, and Reggiani article “What Corporate Social Responsibility Activities are Valued by the Market?”. This article provides a nice synthesis of the two theories and provides some interesting results suggesting that CSR focused at employees is more valued than environmental or diversity CSR activities. This paper helps to solidify the underlying theme of the remainder of the course that long-tern value and CSR can and should often be linked. It is also possible to augment this discussion with the McKinsey article “Assessing the Impact of Societal Issues: A McKinsey Global Survey”, as this article interviews executives about what societal issues they anticipate will affect firm value within the next five years.
• There exists considerable variation in how Stakeholder Theory, and to a lesser extent Shareholder Primacy are presented in the literature. Stakeholder Theory is sometimes cast as suggesting that the only purpose of a corporate is to enhance societal welfare, notably ignoring shareholders’ interests. Thus, the objective function is to maximize the aggregate wealth of all stakeholders. This characterization is more common in the legal literature. Within the business literature, stakeholder theory is frequently portrayed as a form of “responsible” shareholder wealth maximization in that frequently shareholders are treated as first-among-equals and frequently as a reasonable target group. This view frequently emphasizes the need to focus on long-term interests, and suggests that incorporating the interests of all stakeholders is necessary to achieve long-term wealth maximization. Many proponents of the shareholder primacy model would argue for very similar or even identical goals (e.g. Jensen’s Enlightened Wealth Maximization). At the extreme, Shareholder Primacy is sometimes construed to mean managing to the immediate interests of current shareholders (i.e. current stock price), regardless of its impact on future share prices. Many financial economists would view this as a perversion of shareholder primacy resulting from information disparities and agency conflicts.
Additional Talking Points
• Current mortgage crisis. Is there blame? What are the limits of caveat emptor? Did lenders behave unethically? Did borrowers behave irresponsibly? What are the implications of government intervention in this situation?
• Jensen and Erhard’s discussion of integrity. Why do systems get out of integrity? How can we insure that a system remains in integrity?
• What is the role of the government and legal systems in stakeholder theory? Is their role simply to give voice to under-represented stakeholders? Does the presence of legal protection ultimately help or hinder the cause of protected stakeholders? This idea is frequently linked to Hardin’s (1968 Science) “Tragedy of the Commons”, in which unlimited access to and infinite wants of a scarce resource leads to overexploitation. This also raises the question of whether government policy is, or should be, independent of business influence. To the extent that corporations are simply business citizens, this then is a Coasian problem. However, given the nature of transactions costs in coordinating the interests of the many, corporations may have a marked advantage in influencing policy (can use the European pollution credit example).
• If a “supplier” is another corporation, is it ethical for a firm to try to drive the supplier’s economic rents to zero? In what manner is the answer different if the “supplier” is an individual? When is the use of monopsonistic power “appropriate” and when is it “inappropriate”? Classic kind of a WalMart example.
References
• Winkler, Adam, “Corporate law or the law of business?: Stakeholders and corporate governance at the end of history”, Law and Contemporary Problems v.67, pp.109-133.
• Jensen, Michael, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function” on SSRN.
• Greenbaum, Stuart I., 2006, “Corporate governance and the reinvention of finance”, Journal of Applied Finance, 16(2), 5-11.
• Eisenberg, Melvin A., 1998 “Corporate conduct that does not maximize shareholder gain” Legal conduct, ethical conduct, the penumbra effect, reciprocity, the prisoner’s dilemma, sheep’s clothing, social conduct, and disclosure”, Stetson Law Review XXVIII.1, 1-27.
• Barry, Norman, 2002. “The stakeholder concept of corporate control is illogical and impractical”, The Independent Review v.VI(4), pp.541-554.
• Stout, Linda, 2002, “Bad and not-so-bad arguments for shareholder primacy”, Southern California Law Review, 75, 1189-1209.
• Clement, Ronald W., 2005. The lessons from stakeholder theory for U.S. business leaders, Business Horizons, 48, 255-264.
• Bird, Ron, A.D. Hall, F. Momente, and F. Reggiani, 2007 “What corporate social responsibility activities are valued by the market?”, Journal of Business Ethics 76: 189-206.
• “Assessing the impact of societal issues: A McKinsey global survey” 2007.
• Graham, J.R., C.R. Harvey, and S. Rajgopal, 2006. “Value Destruction and Financial Reporting Decisions” Financial Analysts Journal 62(6) 27-39.
• Useem, Jerry and J. Badaracco, Managerial Duties and Business Law, HBS-Case-9-395-244 (note).
• Stout, Lynn. “New Thinking on ‘Shareholder Primacy’”,
• Tirole, Jean, 2001. “Corporate Governance”, Econometrica 69(1), 1-35.
Module 3: Valuation
Learning Goals
• Cover limitations of adjusted weighted average cost of capital
• Introduce APV technique
• Internalization of externalities.
• Overview of financial options including binomial and Black-Scholes valuation techniques.
• Fundamentals of Real Option Valuation
Required Readings
• BMA CH 19-22.
• Luehrman, Timothy A., “Using APV: A better tool for valuing operations”.
• Luehrman, Timothy A., “Investment Opportunities as real options: getting started with the numbers”.
• Luehrman, Timothy A., “Strategy as a portfolio of real options”
• Copeland, Tom and Peter Tufano, “A real-world way to manage real options”
• Mendonca and Oppenheim (2007), “Investing in sustainability: An interview with Al Gore and David Blood” May, 2007 (pp11).
Additional Material
• Tree Values, HBS 9-201-031.
• Timber land and Community Involvement, HBS 9-796-156.
• Plum Creek Timber, HBS 9-801-399. This case, in conjunction with the “What Price Farmed Fish” exercise below, describes some of the complexities of incorporating various stakeholders’ interests into decision-making.
• de Leyva and Lekander (2003), “Climate change for Europe’s utilities”, The McKinsey Quarterly 2003 No. 1. pp120-131. This article describes the European cap and trade system. It appears that the issues raised by the authors regarding inherent weaknesses in the system have come to fruition.
• As a class exercise, we read “What Price Farmed Fish: A Review of the Environmental and Social Costs of Farming Carnivorous Fish”, written by Michael L. Weber for the SeaWeb Aquaculture Clearinghouse. The article provides a fairly comprehensive but accessible discussion of the impacts that carnivorous fish farming has primarily in the U.S., but also worldwide. We use this piece to motivate a discussion of how, from a “stakeholder” perspective, one would go about analyzing the viability of an investment in an aquaculture operation. This exercise is useful to highlight the challenges faced in quantifying certain vital inputs necessary to make investment decisions from the stakeholder perspective. It also brings up the interesting question of the ethics of exporting environmental problems and the challenges of contracting.
• CITIC Tower II HKU199 (Centre for Asian Business Cases) offers a simple real option application that is a useful in-class exercise.
Pedagogical Purpose and Notes
• The coverage by BMA of chapters 16-19 is somewhat mixed with its terminology/topics. For instance, the concept of adjusted-present-value is used in Chapter 18 to explain the trade-off theory, but the concept of APV is not presented until Ch 19. However, Ch 19 makes reference to the leverage beta issues explained in Ch 17. Thus, depending upon the level of preparation of the students, the instructor will need to juggle material from all of the chapters of this section to a certain extent. In this course, I choose to present the APV first because of its usefulness in understanding several aspects of capital structure, and then return to some of the other elements of Ch 19 in later topics.
• Introduce students to the underlying assumptions of traditional NPV analysis and the insights offered by APV analysis. I include in this section a fairly thorough review of estimating cost of capital, focusing primarily on a single-factor market model.
• I next examine a simple valuation example of alternative harvesting strategies somewhat similar to “Tree Values” (HBS 9-201-031). Tree valuation is also particularly appropriate given the real options element later in the module. I follow this quick exercise with a more thorough discussion of estimating free cash flows, especially based on pro forma financial statements. The HBS case 9-206-028 is potentially useful in this regard.
• Challenges of internalizing externalities is worth discussing at this stage, although the topic will likely have been introduced in an earlier module. Neva Goodwin’s “The Limitations of Markets: Backgroung Essay” is quite readable and treats neoclassical economics quite even-handedly. I make a point of distinguishing between an externality (“an economic choice or action that affects the welfare of others who, or that, are not party to the action or choice”) and the notion of project effects on the broader firm vis-à-vis incremental cash flows. An important question is whether and when the economic actor experiences the impact of either positive or negative externalities.
• Pollution is a classic example of an externality, and I like to discuss the inadequacies of current laws in protecting the environment. The exportation of waste is a good example including E-tech waste in China and ship salvage operations in India. There is an interesting 60-Minutes piece on ship salvage operations in India that brings up some interesting dilemmas (including child labor issues).
• In a broader context, we discuss how effectively the “nexus-of-contracts” view of the firm captures or reflects the desired social role of the firm. The European cap and trade system, as described by de Leyva and Lekander (2003), “Climate change for Europe’s utilities”, The McKinsey Quarterly 2003 No. 1. pp120-131 offers an interesting discussion of how easily even well-intentioned programs to internalize externalities are corrupted.
• We follow this material with the HBS case Plum Creek Timber, HBS 9-801-399, in which the challenges of trying to meet all stakeholders’ interests as quite evident, although this company appears to succeed. I also assign “What Price Farmed Fish” as a take-home exercise in which I ask students to identify all affected stakeholders, describe the relative bargaining/contractual power of each group, and devise ways to internalize the externalities of farm-raised fish.
• We then transition into an alternative valuation tool (real options). The coverage and presentation of this material is fairly standard. We use the CITIC Tower II case as a numerical example.
• McDonald’s “Golden Arches” venture into Switzerland is a good example of a very shrewd use of real options in a failed venture. Enron’s construction of peak-use power plants is a good example of real options analysis that pays off. McDonald’s current movie-rental dimension is another good example.
• Students can also consider how to incorporate stakeholder effects into options framework. For instance, the impact that favorable current treatment of one stakeholder group can easy contracting with that group and others in the future.
o An example is a manufacturer moving into a small community. The cost of “doing good” within that community can be viewed as the price of an option to expand production into other small communities with favorable conditions.
o The White and Rao pollution credit example provides some ideas for incorporating real options methods into externality considerations.
Additional Talking Points
• Role of “Best Firms to Work For”, “Best Places to Live”, “Family-Friendly” and “Women-Friendly” publications in attracting skilled work-force (thus reducing search costs) and providing non-pecuniary benefits to employees (thus reducing contracting costs).
• Should every firm seek to engage every stakeholder at the same level or is there a necessary degree of satisficing? Consider Timberland example with its partnership with City Year (described in HBS Case 9-304-086 and in “Strategic collaboration between nonprofits and businesses” by James E. Austin, 2000, published in Non-Profit and Voluntary Sector Quarterly). Alternatively, the Plum Creek Timber case and the “What Price Farmed Fish” can provide useful examples as well.
• Does the incompleteness of a model translate into its lack of usefulness? Many would argue that no model of managerial behavior is complete, as each includes elements and behaviors that cannot be measured or monitored. Does this suggest that these models are flawed? Consider Corning example; where the CEO made his shut-down decision based on instinct more so than through a careful cost/benefit analysis because, in large part, the impact on employees’ motivation was difficult, or even impossible, to predict and/or measure with any degree of certainty. However, in hindsight, the choice appears to have been a correct one (we can’t really speak to whether it was the correct one).
• Have students submit an analysis of the Sulfur Dioxide case by White and Rao. Students will use Black-Scholes to determine whether the utility should purchase pollution credits or install scrubbers. In addition to the proposed questions presented in the case, instructor can talk of pecuniary and potential non-pecuniary benefits of various actions by the utility. The nature of pollution credits and their effect on firm income statements can also be addressed.
• Discuss from the McKinsey pieces executives’ perceptions of societal issues and their impact on value (specifically shareholder value).
References
• Luehrman, Timothy A. “Using APV: A Better Tool for Valuing Operations” in Harvard Business Review May-June, 1997, 145-154.
• Luehrman, Timothy A., “Investment Opportunities as Real Options: Getting Started on the Numbers” in Harvard Business Review July-August 1998, 51-67.
• Luehrman, Timothy A.. “Strategy as a portfolio of real options” Harvard Business Review, Sep/Oct98, Vol. 76 Issue 5, p89-99
• Copeland, Tom and Peter Tufano, “A Real-World Way to Manage Real Options” in Harvard Business Review, March 2004, 90-100.
• Mendonca, Lenny T. and Jeremy Oppenheim, “Investing in sustainability: An interview with Al Gore and David Blood”, The McKinsey Quarterly May, 2007. (available online).
• Assessing the impact of societal issues: A McKinsey global survey” conduct in 2007. (available online).
Module 4: Capital Structure
Learning Goals
• Understand how the choice of capital structure can affect the value of assets.
• Begin to identify the pervasive nature of information asymmetries and their impact on decision-making.
• Trade-Off and Pecking Order theories of capital structure
• Identify how choice of capital structure can affect various stakeholders and these stakeholders’ response.
Required Readings
• BMA Chs 17-18.
• Graham and Harvey (2001) “The theory and practice of corporate finance: evidence form the field” (pages 209-243).
• Wruck (1990) “Financial distress, reorganization, and organizational efficiency”.
• Opler and Titman (1994) “Financial Distress and Corporate Performance”
• Noronha and Singal (2004) “Financial Health and Airline Safety”
• Patrick, Steven C. “Three pieces to the capital structure puzzle: The cases of Alco Standard, Comdisco, and Revco”.
Additional Material
• Sealed Air Corporation’s Leveraged Recapitalization (A) & (B), HBS 5-295-143.
Pedagogical Purpose and Notes
• Most of the material in this module is fairly standard. The exception is that I tend to stress both in lecture and in the readings the impact of financial distress on stakeholders and their response.
• Primary coverage is of impact that capital structure can have on firm value and managers’ ability to pursue value-maximizing policies.
• Graham and Harvey piece provides useful information on the relative importance managers place on each of the theories of capital structure. The paper also provides a brief overview of the salient elements of each theory.
• We start with a demonstration of Modigliani-Miller (1958) and discuss the nature of the assumptions. We then generally follow the Brealey-Myers coverage of the static trade-off and pecking order theories, including a discussion of the Patrick article “Three Pieces of the Capital Structure Puzzle”, which although a bit dated, offers some germane examples.
• Next, we transition into a more in-depth discussion of costs of financial distress. Wruck (1990), Opler and Titman (1994) and Kale and Shahrur (2007) are used as a back-drop for discussing tax-shield and financial distress trade-offs. In general, these show that stakeholders respond to potential financial distress in predicted ways. In addition, the Hertzel, Li, Officer, and Rodgers (2008) article on the effect of bankruptcies along the supply chain is also potentially informative.
• An interesting question arises into how the threat of financial distress can be beneficial to firm value. The Bronars and Deere (1991) article “The threat of unionization, the use of debt, and the preservation of shareholder wealth” offers an interesting example along these lines. The current slate of airline bankruptcies has permitted many of them to renegotiate contracts on favorable terms and possibly playing unions off on one another. Kale and Shahrur provide some direct evidence although the empirics are a bit advanced for many MBAs.
• Classroom discussion can also transition into whether financially distressed firms are more likely to pollute or relax other standards (such as safety). The Noronja and Singal article “Financial Health and Airline Safety” provide an interesting and short read along these lines and shows, as predicted, that financial health and safety are inversely related.
• We conclude with a discussion of the Sealed Air case.
References
• Wruck, Karen, “Financial Distress, Reorganization, and Organizational Efficiency” in Journal of Financial Economics, Vol 27, 1990. pp:419-444.
• Opler, Tim. and S. Titman, 1994, “Financial Distress and Corporate Performance” Journal of Finance 49(3), 1015-1040.
• Graham, John R. and C.R. Harvey. 2001. “The theory and practice of corporate finance: evidence from the field” Journal of Financial Economics 60, 187-243.
• Patrick, Steven C. “Three pieces to the capital structure puzzle: The cases of Alco Standard, Comdisco, and Revco” Journal of Applied Corporate Finance Vol. 7, No. 4 (Winter 1995), pp. 53-61.
• Bronars, S. and D. Deere, 1991. “The threat of unionization, the use of debt, and the preservation of shareholder wealth” Quarterly Journal of Economics 56, 231-254.
• Noronha, Gregory and V. Singal, 2004, “Financial health and airline safety” Managerial and Decision Economics 25, pp. 1-16.
• Hertzel, M., Z. Li, M.S. Officer, and K.M. Rodgers, 2008, “Inter-firm linkages and the wealth effect of financial distress along the supply chain” Journal of Financial Economics 87(2), 374-387.
Module 5: Agency Theory & Governance
Learning Goals
• Understanding the nature of a principal-agent conflict and identify the various conflicts that exist among the stakeholder of a firm.
• Understand the role of contracting and monitoring in addressing the agency issue and the challenges that exist for efficient contracting.
Required Readings
• BMA Ch 12.
• Jensen (1986), “Agency costs of free cash flow, corporate finance, and takeovers”.
• Brewer, Chandra, and Hock (1999) “Economic Value Added (EVA): Its uses and limitations”
• Hall (2003), “Six challenges in designing equity-based pay”.
• Jensen (2003) “Paying people to lie: the truth about the budgeting process.”
• Bryne, John “The best and worst boards” Businessweek Dec, 1997.
• McCafferty, Joseph 2008 “Building an exceptional board” BusinessWeek 4-17-2008.
• Stout, Lynn. 2007. “The mythical benefits of shareholder control”
• Jensen, M., K.J. Murphy, and E.G. Wruck, 2004 “Remuneration: Where we’ve been, how we got to here, what are the problems, and how to fix them” SSRN paper.
Additional Material
• John Lundgren video of how information asymmetries have effects not only between the market and the firm, but also within the firm itself. We can talk about manager’s incentives to cheat one another. This relates closely with Jensen’s article on budgeting.
Pedagogical Purpose and Notes
• This module has four purposes. First, it describes the nature of the agency problem as it exists between managers and shareholders. Second, it examines the efficacy of the compensation contract in better aligning the incentives. Third, it examines the efficacy of the board of directors in addressing the problem. Finally, it maps the agency conflict into the wider range of contracts among various stakeholders.
• We begin this module with a demonstration of the “traditional” agency conflict between managers and shareholders using a simple numerical example. I find it a useful extension to show that the financial consequences on non-manager shareholders of managerial “shirking” is the same if managers instead direct wealth towards other stakeholders. We augment this discussion with Jensen’s “Agency costs of free cash flow, corporate finance, and takeovers”. I primarily focus classroom discussion on the nature of the problem rather than the market-for-corporate-control solution simply to reinforce the myriad ways that agency conflicts can manifest. The market-for-corporate-control solution is much more thoroughly developed in Module 7.
• We next discuss the setting of the compensation contract. We examine the relative strengths and weaknesses of salary, bonus, option, and stock-based pay. An obvious advantage to teaching this module after the valuation module is the depth of discussion this permits for option compensation. The Brewer, Chandra, and Hock article “Economic Value Added (EVA): Its Uses and Limitations” provides a fairly concise discussion of EVA. Similarly, the Hall article “Six Challenges in Designing Equity-based Pay” offers a thorough examination of problems that can arise with equity compensation. Hall and Murphy’s article “The Trouble with Stock Options” discusses various theories for the dramatic rise in the use of options in the 1990s.
• It is interesting to then conclude the discussion of compensation with Jensen’s “Paying People to Lie: The Truth about the Budgeting Process”, as it brings back into the discussion the complexity of the agency problem (emphasizing the potential intrafirm nature of it), and discusses the efficacy of a strictly linear compensation formula. This paper could be discussed earlier as well, but I find that it provides a nice ending to the compensation discussion and segue into the role of the board.
• Alternatively, the lengthy Jensen, Murphy, and Wruck article “Renumeration: Where We’ve Been, How We Got to Here, What Are the Problems, and How Do We Fix Them?” discusses most of the compensation issues raised above and, in aggregate, is a shorter read.
• We then transition into the board’s role in addressing the agency conflict. I have kept the readings in this section more modest. We begin with a discussion of what are the roles of the board, the extent to which agency conflicts also exist with directors, and how might we evaluate a board’s performance. Students will read one or more of the BusinessWeek articles on the “Best and Worst Boards”, which are largely similar. I currently use the 1997 version as the discussion of the board characteristics deemed “effective” seems a bit clearer. More recently (April, 2008), BusinessWeek published an article “Building an Exceptional Board” that lays out many of the same points and is more current.
• Once we outline the characteristics, according to BusinessWeek, of an effective board, we then go through some of the empirical evidence on which characteristics appear to matter. I also like to emphasize the non-monitoring role of the board and how recent NYSE/NASDAQ rules as well as Sarbanes-Oxley, have begun to restrict board composition. In particular, we discuss the recent Boone, Field, Karpoff, and Raheja “The Determinants of Corporate Board Size and Independence: An Empirical Analysis” and the Coles, Daniel, and Naveen “Boards: Does One Size Fit All?” articles (although I do not have the students read these).
• We also discuss the current debate regarding enhancing shareholder power vis-à-vis control over the board. The Stout article “The Mythical Benefits of Shareholder Control” provides some interesting insights into the benefits of a board that is insulated from shareholder whims. In addition to discussing the benefits of informed decision making, he also describes how powerful boards can alleviate intershareholder opportunism and encourage firm-specific investments by stakeholders. We return to these topics in the last module.
Additional Talking Points
• What is the difference between a self-serving manager (one who maximizes his/her own wealth to the detriment of the firm), an incompetent manager, and an unlucky manager? From an analyst’s perspective, what is the difference? How, if at all, can we disentangle the three with contracts? Perhaps link this important discussion to Venky Nagar’s theoretical piece “The role of the manager’s human capital in discretionary disclosure” (JAR 1999)[2].
• What is the role of larger investors, most notably institutional investors? Do markets and stakeholders benefit from their presence? Does there exist an agency relationship between large and small shareholders?
• Challenge students to define “excess” compensation as it relates to high-profile professions such as actors, athletes, and executives. Is “excess” an absolute or relative term?
• What is the nature of intra-firm information asymmetries and agency problems? How might competition among managers for scarce firm resources impede executive-level managers from properly allocating resources within the firm?
• What various agency relationships exist related to a firm? Some possible points for discussion are manager-shareholder, shareholder-bondholder, large-small shareholders, employees-shareholders, bondholders-employees. What about the government and environment; are these principals?
• Recall the Ken Freeman episode at Corning. Do you think that he could have accomplished the same outcome by re-contracting with employees (provided more performance-based pay or, at the other extreme, fired non-performers)? What are the similarities and differences between motivating executives and non-executives?
• What role do stakeholders currently have in corporate governance? To what extent can increasing the power of shareholders help to alleviate (or exacerbate) the current slate of problems? This links to the Stout piece that describes the benefits of housing considerable power in the board and avoiding increased shareholder ability to influence firm decision making. The “team production theory” described by the author has strong elements of a stakeholder-focused view of the firm. Paper also provides a quick, usable description of “duty of care” versus “duty of loyalty” responsibilities of the directors.
• Also recall the Graham, Harvey, and Rajgopal (2006) piece, describing survey of 421 CFOs and documenting their willingness to undertake value-destroying behavior in order to meet earnings expectations or smooth earnings. They also point out the perceived importance of large institutional investors to CFOs.
References
• Jensen, Michael, “Agency Costs of Free Cash Flows, Corporate Finance, and Takeovers” in AEA Papers and Proceedings, May 1986. pp:323-329.
• Brewer, Peter C., Gyan Chandra, and Clayton A. Hock, 1999 “Economic Value Added (EVA): Its Uses and Limitations” SAM Advanced Management Journal Spring, 4-11.
• Jensen, Michael, 2003, Paying People to Lie: the Truth about the Budgeting Process, European Financial Management Vol 9 (3) 379-406.
• Hall, Brian J. “Six Challenges in Designing Equity-Based Pay” in Journal of Applied Corporate Finance V.15 #3, Spring 2003.
• Stout, Lynn A. 2007. “The Mythical Benefits of Shareholder Control”, Virginia Law Review 93, 789-809.
• Byrne, John. “The Best and Worst Boards”, BusinessWeek December, 1997.
• McCafferty, Joseph, 2008. “Building an Exceptional Board” BusinessWeek 4-17-2008.
• Interview with John Lundgren, Chairperson and CEO of The Stanley Works regarding communications, mostly internal, during both good and bad times. Discusses, very general, how this helps to improve corporate bottom line. Suggests more information in bad times benefits all stakeholders because reduces inclination to assume the worst. HBS Video 1359FL.
Possible Questions:
a) What kind of assumptions might employees make during bad times?
b) Message seems focused on internal stakeholders; would you expect the
same advice to be true for external stakeholders?
Module 6: Payout Policy
Learning Goals
• The irrelevance of dividends and how market imperfections potentially enable dividends to contain information.
• Repurchases versus dividend payments.
Required Readings
• BMA: CH 16.
• Brav, Graham, Harvey, and Michaely (2005) “Payout policy in the 21st century”.
Pedagogical Purpose and Notes
• This topic is fairly direct and short. Coverage includes basic understanding of the irrelevance of dividends under perfect market assumptions and how the relaxation of those assumptions leads to potential importance of payout policy.
• Sequencing this module after the capital structure and agency modules allows students to work through the implications for dividend policy, in essence, as a classroom exercise. This also helps students to recall the salient issues in capital structure, and to recognize that these same issues pertain to payout decisions.
• Once we have developed the various positions on dividends as described in Brealey, Myers, and Allen, we then discuss actual patterns and incentives as reported by Brav, Graham, Harvey, and Michaely (2005).
Additional Talking Points
• To what extent can the hording of cash serve stakeholders’ interests and which stakeholders?
• What is the relation, if any, between capital structure theory and dividend policy? Why might some firms actually borrow to pay dividends?
• Why might a dividend omission send a more positive signal than a dividend cut? What is the empirical evidence on this point?
• The Brav et al. (2005) piece provides interesting statistics on the importance of various payout policy theories on executives for large firms. In addition, the different theories are briefly described.
References
• Brav, A., J.R. Graham, C.R. Harvey, and R. Michaely (2005) “Payout policy in the 21st century” Journal of Financial Economics 77, pp 483-527.
Module 7: M&A and Corporate Structure
Learning Goals
• Description of the various forms of restructuring and the importance of the market for corporate control.
• Coverage of traditional economic rationales for M&As, both compelling and not so compelling.
• Understand the motivations for corporate diversification and the nature of the evidence surrounding this issue.
• Understand the term “managerial entrenchment”, how this is accomplished, and good and bad economic rationales for entrenchment.
Required Readings
• BMA Ch 32-34.
• Holmstrom and Kaplan (2001) “Corporate governance and merger activity in the United States: Making sense of the 1980s and 1990s”.
• Jensen (1986), “Agency costs of free cash flow, corporate finance, and takeovers”
• Fee and Thomas (2004) “Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms”.
• Strine (2002), “The social responsibility of boards of directors and stockholders in change of control transactions: is there any ‘there’ there?”.
• Harford (2003) “Takeover bids and target directors’ incentives: the impact of a bid on directors’ wealth and board seats”.
• Gompers, Ishii, and Metrick (2003) “Corporate governance and equity prices”
Additional Material
• Veridian Case “Putting Value to Values” HBS Case 9-406-028, provides many teachable points, including firm’s goal of becoming the employer of choice in the industry and whether simple financial considerations should determine the merits of an acquisition decision.
Possible Questions:
a) Teaching note presents the most salient questions.
• A Note on Mergers and Acquisitions and Valuation, Ivey Case 95-B023.
Pedagogical Purpose and Notes
• This module is a bit of a catch-all, as it covers mergers and acquisitions, issues related to the market for corporate control, corporate structure, diversification, and entrenchment. In general, I frame this module around the Holmstrom and Kaplan (2001) article “Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s”, which provides an excellent synthesis of the various motivations underlying merger activity.
• We begin with a discussion of basic forms of restructuring, including spin-offs, carve-outs, and LBOs. By this stage, students are pretty savvy when asked whether these restructurings will affect value (my personal favorite is “well, they shouldn’t, but since the companies are doing them, they must!”). We discuss various explanations for why value may change. Due to time constraints I have kept the outside reading for these topics to a minimum as the Brealey, Myers, and Allen text addresses them quite well and succinctly.
• We next move to mergers and acquisitions. Initially, we examine acquisitions as strictly a capital budgeting decision (and contrast it with relying on organic growth) including methods for valuation. “A Note on Mergers and Acquisitions and Valuation” (Ivey Case 95-B023) provides some useful material along these lines.
• Within this context, we discuss various explanations for acquisition decisions including those that enhance and destroy current shareholder value and the fact that M&As often bring the conflict between shareholders and other stakeholders into the sharpest contrast. To provide some discussion points, we read the Fee and Thomas article “Source of Gains in Horizontal Mergers: Evidence from Customer, Supplier, and Rival Firms” and the Leo Strine article “The Social Responsibility of Boards of Directors and Stockholders in Change of Control Transactions: Is There Any ‘There’ there?”. There are also several studies that discuss the impact of takeovers on wages, both executive and non-executive, with the general consensus that wages decline as a result of acquisitions.
• I highlight in this discussion the various conflicts that arise among stakeholders. In particular, I note that M&As can offer one of the clearest decision points for managers and the board between their self-interest and that of non-shareholder stakeholders on the one hand, and the shareholders on the other hand.
• We next transition into a discussion of the disciplinary role of takeovers and continue our discussion of Jensen’s (1986) piece and focus on one particular example of potential managerial overinvestment: diversifying acquisitions. We discuss how the incentives to diversify can differ between management (and other stakeholders) and shareholders, and then examine the nature of the evidence on the impact of diversification on value. Time permitting, students could read the Berger and Ofek (1995) article and some of their follow-up work, as well as the criticisms of Campa and Kedia (1999), namely that acquirers were discounted firms prior to diversifying, and Graham, Lemmon, and Wolf’s (2000) article arguing that diversified firms are simply different. Belen Villalonga’s SSRN article “Research Roundtable Discussion: The Diversification Discount” offers some addition interesting insights into this debate.
• We then discuss the disciplinary role of acquisitions, especially in the 1980s. We review evidence of takeovers on directors wealth, especially as discussed in Harford’s “Takeover Bids and Target Directors’ Incentives: The Impact of a Bid on Directors’ Wealth and Board Seats”. This leads to our discussion of management and directors incentives to insulate themselves from the market for corporate control.
• The final topic is the impact of takeover provisions on shareholders’ wealth. We cover each of the provisions included in the Gompers, Ishii, and Metrick (2003) index. We then discuss the entrenchment and shareholder interest interpretations of takeover provisions and the nature of the evidence consistent with each interpretation.
• Finally, we conclude with the Veridian case (HBS 9-406-028). This case brings into focus many of the issues raised in the course and offer students the opportunity to explicitly focus on a takeover opportunity where impact on various stakeholders are not uniformly beneficial.
Additional Talking Points
• Why might managers become concerned that the market value of their firms do not immediately reflect, in managers’ opinion, the economic value of the firm? Might not competitor firms with better information, or at least more timely information, see undervalued firms as ideal investment opportunities (under-priced assets) and make the acquisition? Does this serve target firm shareholders’ interests and/or managerial interests? Can we offer management mechanisms to reduce these concerns, such as antitakeover devices? Are these mechanisms double-edged swords?
References
• Holmstrom, B. and S.N. Kaplan, 2001. “Corporate governance and merger activity in the United States: Making sense of the 1980s and 1990s” Journal of Economic Perspectives 15(2), 121-144.
• Jensen, Michael, “Agency Costs of Free Cash Flows, Corporate Finance, and Takeovers” in AEA Papers and Proceedings, May 1986. pp:323-329.
• Fee, C.E and S. Thomas, 2004, “Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms”, Journal of Financial Economics 74, 423-460.
• Strine, Leo E., Jr. 2002. “The social responsibility of boards of directors and stockholders in change of control transactions: is there any ‘there” there?”, Southern California Law Review v.75, 1169-1188.
• Harford, Jarrad, 2003, Takeover bids and target directors’ incentives: the impact of a bid on directors’ wealth and board seats, Journal of Financial Economics 51-83.
• Gompers, P., J. Ishii, and A. Metrick. 2003, “Corporate governance and equity prices”
Quarterly Journal of Economics 118. 107-155.
FIN 526 Project
The purpose of this project is to allow you the opportunity to apply some of the concepts/theories that we are covering to a publicly-traded firm. Some of the assignments will be quite quantitative (such as packet 1 below), while others are much more qualitative. By the end of the semester, you must have submitted 4 of the 5 packets. If you elect to complete all 5 packets, I will count the 4 highest grades. Each will be scored out of 10. The length of each packet is your decision. You should provide sufficient documentation to make your assertions and/or analyses clear, but brevity is always appreciated. Your target audience is a new member to the board, whom you may assume to be a savvy professionals but without any particular knowledge of your company.
I am happy to provide preliminary feedback on any packet, but please do not submit “rough” rough-drafts; this is not a fishing expedition.
Packet 1) Please describe your firm, including a brief history, its industry and current place in the industry, the nature of the products/services it provides, and what connection, if any, this firm has to you. What is the current beta for your firm? Is this a levered or unlevered beta? What is the current unlevered beta for your firm (if different)? What is your firm’s capital structure? What is the cost of capital for your firm? Please carefully document your sources, calculations, and assumptions.
Packet 2) Who are the primary stakeholders in your firm? How explicitly are the interests of stakeholders addressed in your company’s public documents (annual reports, proxy statements, news accounts)? What are the likely costs of financial distress to your firm (in qualitative terms if not some quantitative analysis)?
Packet 3) What is a typical project or investment for your company? Please discuss the most appropriate valuation method for this firm’s capital budgeting. Does your firm possess real options? How could you begin to analyze the value of any real options that your company may possess?
Packet 4) Describe the governance structure of your firm. How entrenched are managers? What is the nature of the compensation policy of your firm vis-à-vis other firms in the same industry (this can be somewhat general, but some analysis should be done). How would you describe the primary function of the board for your company? Which stakeholders’ interests are best reflected in your firm’s compensation policy? What improvements would you suggest to better link managers’ self-interest to firm value and enlightened shareholder wealth maximization?
Packet 5) What strategies has your company pursued for growth (organic or M&A)? How diversified is your firm? How does or would your company likely benefit from increased diversification, or, if already heavily diversified, how would refocusing potentially help your firm? How has your firm financed its growth? Has the growth of your firm created value? If so, for whom?
Course Modules in Brief - Without Talking Points, Pedagogical Purpose and Notes – More appropriate For Students
Module 1: Review Fundamental Microeconomics and Financial Management
Learning Goals
• Review basic concepts of time value, project and firm valuation, capital budgeting, risk-reward, market efficiency.
• Review market structures, short and long-term equilibrium, competition, normal and excess profit, barriers to entry, monopolies and monopsonies.
Required Readings
a) BMA CHs 1-11. (review of intro finance course)
b) Goodwin, Neva. “The limitations of markets” Background essay”.
c) Graham and Harvey (2001) “The theory and practice of corporate finance: evidence from the field” (only read pages 187-209).
References and Additional Readings
a) Shrieves, Ronald E. and John M. Wachowicz, 2000,”Free Cash Flow (FCF), Economic Value Added (EVATM) and Net Present Value (NPV): A Reconciliation of Variations of Discounted-Cash-Flows (DCF) Valuation”, unpublished manuscript, University of Tennessee.
b) McAfee, R. Preston, Hugo M. Mialon, and Michael A. Williams, 2003, “What is a barrier to entry?”, unpublished manuscript, University of Texes, Austin, and Analysis Group Inc.
c) Graham, John R. and C.R. Harvey. 2001. “The theory and practice of corporate finance: evidence from the field” Journal of Financial Economics 60, 187-243.
Module 2: Normative Theories of Managerial Behavior
Learning Goals
• Describe the following models
o shareholder primacy
o stakeholder model
o balanced scorecard
o enlightened value maximization
o long-term value primacy
• Describe perfect market assumptions
• Long-term vs. Short-term view of the firm.
• Legal framework for managerial decision making.
Required Readings
a) Winkler, Adam, “Corporate laws or the law of business?: Stakeholders and corporate governance at the end of history”.
b) Stout, Lynn, 2002, “Bad and not-so-bad arguments for stakeholder primacy”.
c) Clement (2005). The lessons from stakeholder theory for U.S. business leaders
d) Barry, Norman, 2002. “The stakeholder concept of corporate control is illogical and impractical”.
e) Jensen, Michael, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function”.
f) Graham, Harvey, and Rajgopal (2006), “Value Destruction and Financial Reporting Decisions”
g) Stout, Lynn. 2005, “New Thinking on “Shareholder Primacy”
h) Bird, Ron, A.D. Hall, F. Momente, and F. Reggiani “What corporate social responsibility activities are valued by the market?”
Optional
i) Useem and Badaracco “Managerial Duties and Business Law”
j) Eisenberg, Melvin Aron, “Corporate conduct that does not maximize shareholder gain”
k) Tirole, Jean, 2001. “Corporate Governance”
l) Greenbaum, Stuart I., “Corporate governance and the reinvention of finance”.
Module 3: Project Valuation
Learning Goals
• Cover limitations of adjusted weighted average cost of capital
• Introduce APV technique
• Internalization of externalities.
• Overview of financial options including binomial and Black-Scholes valuation techniques.
• Fundamentals of Real Option Valuation
Required Readings
• BMA CH 19-22.
• Luehrman, Timothy A., “Using APV: A better tool for valuing operations”.
• Luehrman, Timothy A., “Investment Opportunities as real options: getting started with the numbers”.
• Luehrman, Timothy A., “Strategy as a portfolio of real options”
• Copeland, Tom and Peter Tufano, “A real-world way to manage real options”
• Mendonca and Oppenheim (2007), “Investing in sustainability: An interview with Al Gore and David Blood” May, 2007 (pp11).
• “Assessing the impact of societal issues: A McKinsey global survey” 2007.
Cases
o Tree Values, HBS 9-201-031.
o Plum Creek Timber, HBS 9-801-399.
o What Price Farmed Fish: A Review of the Environmental and Social Costs of Farming Carnivorous Fish”, written by Michael L. Weber for the SeaWeb Aquaculture Clearinghouse.
Module 4: Capital Structure
Learning Goals
• How choice of capital structure can affect the value of assets.
• Understand the importance of information asymmetry.
• Trade-Off and Pecking Order theories of capital structure.
References
d) BMA Chs 17-18.
e) Graham and Harvey (2001) “The theory and practice of corporate finance: evidence form the field” (pages 209-243).
f) Wruck (1990) “Financial distress, reorganization, and organizational efficiency”.
g) Opler and Titman (1994) “Financial Distress and Corporate Performance”
h) Hertzel, M., Z. Li, M.S. Officer, and K.M. Rodgers, 2008, “Inter-firm linkages and the wealth effect of financial distress along the supply chain”
i) Noronha and Singal (2004) “Financial Health and Airline Safety”
j) Patrick, Steven C. “Three pieces to the capital structure puzzle: The cases of Alco Standard, Comdisco, and Revco”.
Cases
1. Sealed Air Corporation’s Leveraged Recapitalization (A) & (B), HBS 5-295-143.
Module 5: Agency Theory, Governance, Monitoring, and Compensation
Learning Goals
• Understanding the nature of a principal-agent conflict and identify the various conflicts that exist among the stakeholder of a firm.
• Understand the role of contracting and monitoring in addressing the agency issue and the challenges that exist for efficient contracting.
References
• BMA Ch 12.
• Jensen (1986), “Agency costs of free cash flow, corporate finance, and takeovers”.
• Brewer, Chandra, and Hock (1999) “Economic Value Added (EVA): Its uses and limitations”
• Hall (2003), “Six challenges in designing equity-based pay”.
• Jensen (2003) “Paying people to lie: the truth about the budgeting process.”
• Bryne, John “The best and worst boards” Businessweek Dec, 1997.
• McCafferty, Joseph 2008 “Building an exceptional board” BusinessWeek 4-17-2008.
• Stout, Lynn. 2007. “The mythical benefits of shareholder control”
Optional
• Jensen, M., K.J. Murphy, and E.G. Wruck, 2004 “Remuneration: Where we’ve been, how we got to here, what are the problems, and how to fix them” SSRN paper.
Module 6: Payout Policy
Learning Goals
• The irrelevance of dividends and how market imperfections potentially enable dividends to contain information.
• Repurchases versus dividend payments.
Readings
• BMA: CH 16.
• Brav, A., J.R. Graham, C.R. Harvey, and R. Michaely (2005) “Payout policy in the 21st century” Journal of Financial Economics 77, pp 483-527.
Module 7: Market for Corporate Control, Diversification, and Entrenchment
Learning Goals
• Understand the role of M&A as a capital-budgeting device and as a disciplining device (are these different?).
• Coverage of traditional economic rationales for M&As, both compelling and not as compelling.
• Understand the motivations for corporate diversification and the nature of the evidence surrounding this issue.
• Understand the term “managerial entrenchment”, how this is accomplished, and good and bad economic rationales for entrenchment.
References
a) BMA Ch 32-34.
b) Holmstrom and Kaplan (2001) “Corporate governance and merger activity in the United States: Making sense of the 1980s and 1990s”.
c) Jensen (1986), “Agency costs of free cash flow, corporate finance, and takeovers”
d) Fee and Thomas (2004) “Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms”.
e) Strine (2002), “The social responsibility of boards of directors and stockholders in change of control transactions: is there any ‘there’ there?”.
f) Harford (2003) “Takeover bids and target directors’ incentives: the impact of a bid on directors’ wealth and board seats”.
g) Gompers, Ishii, and Metrick (2003) “Corporate governance and equity prices”
Cases
1. Veridian Case “Putting Value to Values” HBS Case 9-406-028.
Complete Course References
Assessing the impact of societal issues: A McKinsey global survey” conduct in 2007. (available online).
Barry, Norman, 2002. “The stakeholder concept of corporate control is illogical and impractical”, The Independent Review v.VI(4), pp.541-554.
Bird, Ron, A.D. Hall, F. Momente, and F. Reggiani, 2007 “What corporate social responsibility activities are valued by the market?”, Journal of Business Ethics 76: 189-206.
Brav, A., J.R. Graham, C.R. Harvey, and R. Michaely (2005) “Payout policy in the 21st century” Journal of Financial Economics 77, pp 483-527.
Brewer, Peter C., Gyan Chandra, and Clayton A. Hock, 1999 “Economic Value Added (EVA): Its Uses and Limitations” SAM Advanced Management Journal Spring, 4-11.
Bronars, S. and D. Deere, 1991. “The threat of unionization, the use of debt, and the preservation of shareholder wealth” Quarterly Journal of Economics 56, 231-254.
Byrne, John. “The Best and Worst Boards”, BusinessWeek December, 1997.
Clement, Ronald W., 2005. The lessons from stakeholder theory for U.S. business leaders, Business Horizons, 48, 255-264.
Copeland, Tom and Peter Tufano, “A Real-World Way to Manage Real Options” in Harvard Business Review, March 2004, 90-100.
Eisenberg, Melvin A., 1998 “Corporate conduct that does not maximize shareholder gain” Legal conduct, ethical conduct, the penumbra effect, reciprocity, the prisoner’s dilemma, sheep’s clothing, social conduct, and disclosure”, Stetson Law Review XXVIII.1, 1-27.
Fee, C.E and S. Thomas, 2004, “Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms”, Journal of Financial Economics 74, 423-460.
Goodwin, Neva. “The limitations of markets: Background essay” from .
Gompers, P., J. Ishii, and A. Metrick. 2003, “Corporate governance and equity prices”
Quarterly Journal of Economics 118. 107-155.
Graham, John R. and C.R. Harvey. 2001. “The theory and practice of corporate finance: evidence from the field” Journal of Financial Economics 60, 187-243.
Graham, J.R., C.R. Harvey, and S. Rajgopal, 2006. “Value Destruction and Financial Reporting Decisions” Financial Analysts Journal 62(6) 27-39.
Greenbaum, Stuart I., 2006, “Corporate governance and the reinvention of finance”, Journal of Applied Finance, 16(2), 5-11.
Hall, Brian J. “Six Challenges in Designing Equity-Based Pay” in Journal of Applied Corporate Finance V.15 #3, Spring 2003.
Harford, Jarrad, 2003, Takeover bids and target directors’ incentives: the impact of a bid on directors’ wealth and board seats, Journal of Financial Economics 51-83.
Hertzel, M., Z. Li, M.S. Officer, and K.M. Rodgers, 2008, “Inter-firm linkages and the wealth effect of financial distress along the supply chain” Journal of Financial Economics 87(2), 374-387.
Holmstrom, B. and S.N. Kaplan, 2001. “Corporate governance and merger activity in the United States: Making sense of the 1980s and 1990s” Journal of Economic Perspectives 15(2), 121-144.
Jensen, Michael, “Agency Costs of Free Cash Flows, Corporate Finance, and Takeovers” in AEA Papers and Proceedings, May 1986. pp:323-329.
Jensen, Michael, 2003, Paying People to Lie: the Truth about the Budgeting Process, European Financial Management Vol 9 (3) 379-406.
Jensen, Michael, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function” on SSRN.
Luehrman, Timothy A. “Using APV: A Better Tool for Valuing Operations” in Harvard Business Review May-June, 1997, 145-154.
Luehrman, Timothy A., “Investment Opportunities as Real Options: Getting Started on the Numbers” in Harvard Business Review July-August 1998, 51-67.
Luehrman, Timothy A.. “Strategy as a portfolio of real options” Harvard Business Review, Sep/Oct98, Vol. 76 Issue 5, p89-99.
McCafferty, Joseph, 2008. “Building an Exceptional Board” BusinessWeek 4-17-2008.
Mendonca, Lenny T. and Jeremy Oppenheim, “Investing in sustainability: An interview with Al Gore and David Blood”, The McKinsey Quarterly May, 2007. (available online).
Noronha, Gregory and V. Singal, 2004, “Financial health and airline safety” Managerial and Decision Economics 25, pp. 1-16.
Opler, Tim. and S. Titman, 1994, “Financial Distress and Corporate Performance” Journal of Finance 49(3), 1015-1040.
Patrick, Steven C. “Three pieces to the capital structure puzzle: The cases of Alco Standard, Comdisco, and Revco” Journal of Applied Corporate Finance Vol. 7, No. 4 (Winter 1995), pp. 53-61.
Stout, Lynn, 2002, “Bad and not-so-bad arguments for shareholder primacy”, Southern California Law Review, 75, 1189-1209.
Stout, Lynn A. 2007. “The Mythical Benefits of Shareholder Control”, Virginia Law Review 93, 789-809.
Stout, Lynn. “New Thinking on ‘Shareholder Primacy’”,
Strine, Leo E., Jr. 2002. “The social responsibility of boards of directors and stockholders in change of control transactions: is there any ‘there” there?”, Southern California Law Review v.75, 1169-1188.
Tirole, Jean, 2001. “Corporate Governance”, Econometrica 69(1), 1-35.
Useem, Jerry and J. Badaracco, Managerial Duties and Business Law, HBS-Case-9-395-244 (note).
Winkler, Adam, “Corporate law or the law of business?: Stakeholders and corporate governance at the end of history”, Law and Contemporary Problems v.67, pp.109-133.
Wruck, Karen, “Financial Distress, Reorganization, and Organizational Efficiency” in Journal of Financial Economics, Vol 27, 1990. pp:419-444.
-----------------------
[1] In many respects, the stakeholder model is an emerging model with less well-defined goals and terminology than the shareholder primacy model. Donaldson and Preston (1995, Academy of Management Review) provide a lucid description of this issue.
[2] This might be a good read for students although it will likely be at the limit of their technical ability. Oliver Kim’s discussion of paper in the same edition is equally insightful and offers a more condensed presentation of the salient results.
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