Corporate Finance
Professor Paola Sapienza
Finance II (441)
Supplementary Readings for Corporate Finance

---

There is a phenomenal amount of material on the web (which you know). This page will include links to articles and other information that I have found and which may be of interest to you. I have sorted the articles by lecture topic. If you read articles related to the lectures that you think I should list here please let me know.

Overview

· Lecture 1: Efficient Markets.

1. Historical Stock Market Anomalies.This is a very interesting site that discusses various anomalies that challenge the market efficiency hypothesis.
   2. Buffet' s gorilla and coin flipping discussion from Investorhome.
   3. Young Investors are More Bullish. This is an article on the expected stock return of investors based on how long they have been investing. Investors with less experience (or more importantly who have only experienced extremely high returns), expect higher returns in the future. How do you reconcile these factoids with the idea of an efficient market?
   4. Foreign Funds May Not Offer Much Portfolio Diversification. One of the few free lunches in finance is diversification. In this way, you can reduce your risk without reducing your expected return. Diversifying internationally is one way to do this. This article discusses the diminished, although still positive gains from international diversification.
   5. A Hedge Fund Falters, So the Fed Persuades Big Banks to Ante Up. This is an article about the near collapse of Long Term Capital Management and the subsequent rescue by a group of banks, orchestrated by the Federal Reserve Bank of New York. LTCM is a group of high tech traders that have been very successful until now.
   6. How a Big Hedge Fund Marketed Its Expertise, Shrouded Its Risks. Second in a series of articles on LTCM.
   7. NYT, January 24 on LTCM

· Lecture 2: Capital Budgeting

• A Better Beta. The Economist, March 27, 1999.
• How High a Hurdle? When Aegon, a Dutch life insurer known for taking care of its shareholders, bought Transamerica, a San Francisco-based insurer, Aegon said it was expecting a return of only 9% from the deal, well below the 11% hurdle rate it once proclaimed as its benchmark.

· Lecture 3: Corporate Valuation

• Working Capital Management. This article from CFO magazine describes the way several firms have boosted their cash flow by reducing their working capital. Why don’t all firms do this? Is there a cost of reducing working capital?
• Fast-Food Chains Upgrade Menus, And Profits, With Pricey Sandwiches. This article describes the market for upscale sandwiches, a la Au Bon Pain’s St. Louis Bread Company project.

· Lecture 4-5: Financial Options and other Derivatives

• Endorsing Options in a guarded way. WSJ’s Clements discuss some of the ideas in Lecture 4’s Risk Management

· Lecture 6: Real Options

• Making real options real, Tom Copeland and P. Keenan,  The McKinsey Quarterly, 1998 Number 3, pp. 128-141
• Getting real, CFO Magazine, July, 1999.

· Lecture 7:

• The value of share buybacks, The McKinsey Quarterly, 2005, 3.

· Lecture 8: Capital Structure Irrelevance

• Modigliani-Miller after 40 years. CFO Magazine, July, 1998

· Lecture 9: Capital Structure with Taxes

· Lecture 10

• The Federal Express Story - A Real Example of Risk Shifting. An example of manager's increasing the risk of their firms. In expectation this is good for equity holders. In this specific case, it turned out well for everyone - except the casino.

· Lecture 11:

· Lecture 12: Capital Structure with conflict of interests

• In 1999, the practice of repricing stock options died. In 2001, it was reborn
• New SEC proxy rules, Business Week Article

· Lecture 13: Risk Management

• On interest rates and hedging policies.

· Lecture 14: Hybrid securities

• Term Sheets. When banks issue securities, they distribute term sheets which contain the basic details for the security. These are term sheets for a convertible bond and a convertible preferred equity offering. The convertible bond is different than the one we discussed in class. It is a mandatory convert, but the conversion price is variable and depends upon the price of the common stock.
• Convertible Special Report. This analyst report is an excellent review of the basics of convertible securities. It is outstanding in describing the pluses and minus of the securities, relative to standard debt or equity. It also has an excellent summary of approximately 40 different securities and acronyms, issued by several different banks. The summary on page 51, classifies each security into a small number of categories. This way you can see which product issued by one bank (PIES by Lehman) is essentially the same as a product issued by another bank (PRIDES by Merrill). Remember, if it is a cat name (PRIDES, STRYPES, LYONS, Feline), it’s a Merrill product.

· Lecture 15: Market for corporate control

• Value Creation in M&A. This is a study of 39 M&A deals by Michael Mauboussin who is at CSFB. Notice how the arguments mirror many of the concepts we have covered in class. One of the issues upon which he focus, which we have not is EPS. There is an impression that accretive deals (deals that increase the bidders EPS) lead to more favorable stock price responses. Mr. Mauboussin finds this is not true.

Top of the page

Course Main Page

Kellogg

---

If you have questions about this web page, send them to Paola-Sapienza@northwestern.edu