My Twitter

  • Subscribe to our RSS feed.
  • Twitter
  • StumbleUpon
  • Reddit
  • Facebook
  • Digg

Sunday, 18 January 2009

Corporate Finance - post crisis

Posted on 17:56 by Unknown
I just finished teaching my first corporate finance class in the post-crisis period (to an executive MBA class). Having taught this class for close to 25 years now, I was wondering how I would bring in the events of the last few months into the sessions and be able to draw out the implications for businesses. I must confess that it was a lot less trying than I thought it would be.

In broad terms, these are the corporate finance implications that I see for the near future and the long term:
a. In investment analysis: I see a shift away from expected value and base case valuations that have dominated financial analysis for the last few decades to more probabilistic approaches. Since both the data and the tools (Crystal Ball, @Risk etc.) are accessible and available now to most of us, I think this shift is long overdue.

b. In risk and hurdle rates: For the near term, I see a move towards higher risk premiums for both equity and debt, reflecting recent history and changes in risk aversion. In the long term, I think that we have to become more dynamic in our assesments of risk parameters and premiums, since the assumption that these numbers don't change much has clearly been shaken. Put another way, we have to accept the fact that risk premiums can change quickly even in developed markets and even more so in emerging markets.

c. In capital strucure: If debt represents a trade off between tax benefits on one side and expected bankruptcy costs on the other, the last few months have clearly tilted the scales away from the use of debt. The probability of distress and the cost of distress have both increased, particularly so for large companies where the notion that capital markets would provide needed funds is no longer universally accepted. I expect to see debt ratios decrease as companies retool and a less cavalier use of short term financing to fund long term assets.

d. In dividend policy: In the short term, companies will value liquidity and cash balances will go up. In the long term, the events of the last few months will make companies even more wary about instituting and increasing dividends (because of the instability and unpredictability of earnings) and I would not be surprised to see even more of a shift towards flexible cash return policies (stock buybacks).

I feel more confortable now, going into the new semester. I don't have all of the answers but I feel that I have a framework for approaching the questions. The 450 students in my class will put me to the test and I am looking forward to it. You will have a ring side seat.
Email ThisBlogThis!Share to XShare to Facebook
Posted in | No comments
Newer Post Older Post Home

0 comments:

Post a Comment

Subscribe to: Post Comments (Atom)

Popular Posts

  • Equity Risk Premiums and the Fear of Catastrophe
    As many of you already know, I am a little fixated on the equity risk premium. More than any variable, it explains what happens in equity ma...
  • Love the company! Love the product! Love the stock? An Update on Apple
    My first computer was a Mac 128K . I was a budget-constrained doctoral student from UCLA, teaching my very first class at UC Berkeley. At $2...
  • Hard wired to deceive?
    As the Madoff story runs its course and investors express surprise and shock that they were taken to the cleaners, it may be worth noting th...
  • Cash and Cross holdings
    I am sorry about the long break between posts but I was on the road for much of the last two weeks and grading exams prior to that. I starte...
  • Many a slip between the cup & the lip: From forward value to value per share today
    Valuing young, growth companies is never easy to do but it is well worth doing, partly because it forces you think through the business that...
  • Emotions, Intrinsic value and Dividend Clienteles: The Apple trade postscript
    Now that I have read some of the reactions to my post on "folding" on Apple, I would like to respond to at least three issues that...
  • Twitter announces IPO: The Valuation
    A little more than a week ago, I posted my first take on Twitter and argued that even in the absence of financial information from the comp...
  • Transactions Costs and Beating the Market
    One of my books, Investment Fables , is directed at answering one of the most puzzling questions in investments: How is that there seem to b...
  • Time to Split!!
    As many of you are probably aware, Berkshire Hathaway has announced its intent to split its class B shares and the requisite "deep anal...
  • Hundred dollar bills are hard to come by!
    It looks like I just I cannot stay away from the Apple story, with Tim Cook making a splash (or a belly flop) with his speech in New York ye...

Categories

  • Acquisitions
  • Corporate Governance
  • Data Observations
  • Dividends and cash balances
  • Equity Risk Premiums
  • Facebook
  • Facebook IPO
  • Governments and value
  • I
  • Information
  • Introduction to web site
  • Investment Philosophy
  • IPO
  • liquidity
  • prices and value
  • Private Equity
  • Taxes and value
  • Teaching
  • The
  • Value and Pricing
  • Value Investing
  • Value of a franchise
  • Value of growth
  • Year end

Blog Archive

  • ►  2013 (36)
    • ►  November (2)
    • ►  October (7)
    • ►  September (7)
    • ►  August (1)
    • ►  July (4)
    • ►  June (2)
    • ►  May (1)
    • ►  April (2)
    • ►  March (2)
    • ►  February (5)
    • ►  January (3)
  • ►  2012 (49)
    • ►  December (8)
    • ►  November (3)
    • ►  October (4)
    • ►  September (3)
    • ►  August (3)
    • ►  July (2)
    • ►  June (5)
    • ►  May (5)
    • ►  April (6)
    • ►  March (3)
    • ►  February (3)
    • ►  January (4)
  • ►  2011 (55)
    • ►  December (3)
    • ►  November (3)
    • ►  October (5)
    • ►  September (6)
    • ►  August (4)
    • ►  July (3)
    • ►  June (3)
    • ►  May (4)
    • ►  April (7)
    • ►  March (5)
    • ►  February (6)
    • ►  January (6)
  • ►  2010 (45)
    • ►  December (5)
    • ►  November (6)
    • ►  October (4)
    • ►  September (6)
    • ►  July (1)
    • ►  June (4)
    • ►  May (2)
    • ►  April (3)
    • ►  March (5)
    • ►  February (4)
    • ►  January (5)
  • ▼  2009 (60)
    • ►  December (3)
    • ►  November (6)
    • ►  October (5)
    • ►  September (6)
    • ►  August (3)
    • ►  July (3)
    • ►  June (4)
    • ►  May (4)
    • ►  April (5)
    • ►  March (9)
    • ►  February (7)
    • ▼  January (5)
      • Bias in Valuation
      • Rebirths and Fresh starts!
      • Data update for January 2009
      • Corporate Finance - post crisis
      • Accounting Fraud
  • ►  2008 (42)
    • ►  December (6)
    • ►  November (8)
    • ►  October (13)
    • ►  September (15)
Powered by Blogger.

About Me

Unknown
View my complete profile