Corporate Finance Course: Overview of new Video Course on Efficient Capital Markets and Behavioural Finance

I’m starting a new chapter and so we have a new video series.  When I was learning Finance, Efficient Market Theory was the standard approach to understanding the dynamics of financial markets.

However, since the Global Financial Crisis in 2007/2008 and the apparent decoupling of the financial markets from the real economy because of quantitative easing and other factors, the whole efficient markets paradigm has been questioned.

In its place is the view that markets are not efficient but instead driven by sentiment and irrational investor behaviour.  In this video series we will look at both approaches, explain the theory, and review the empirical evidence.  We’ll then consider both views in the context of corporate finance.

In this Video (4 mins):

  • Overview of new series on Efficient Market Theory and Behavioural Finance

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Corporate Finance Course: A Brief Introduction to EVA – Economic Value Added

In this 15 minute video I talk about EVA (Economic Value Added).  Like all of my videos, I seek to explain Finance concepts in as simple a way as possible.

EVA is good as a method to assess performance because it takes out the capital costs from earnings figures.  This is superior to straightforward accounting measures of performance.  However, I have a lot of problems with its use to assess investment because it assumes that earnings figures will continue forever without change (clearly unrealistic!).

Topics covered in the video:

  • Using EVA for performance measurement and investment appraisal.
  • EVA: A worked example
  • Strengths and weaknesses of EVA

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Corporate Finance Course: How do Firms Estimate Their Cost of Capital in Practice?

This is a very short video where I discuss the different approaches to calculating cost of capital in practice.  As you would expect, theory diverges regularly from what you see in practice!

Topics covered in this video:

  • Discussion of different approaches to calculating Cost of Capital
  • Review of practices in US, UK, Germany, France, The Netherlands

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The Best Finance Textbooks 2015-2016

It’s that time of year again when students are thinking of buying their  books and wondering which ones to get.  I am lucky that I receive a lot of sample books to evaluate and so I suppose I’m in a good position to assess the different qualities of textbook that are available.

There are clearly different markets for textbooks.  Some readers are just wanting an introduction to the topic whereas others need a lot more depth.  In assessing which textbooks are the best, I’ve gone for a combination of academic rigour and practical relevance via case studies and real life examples.  I also look for books that are up to date with the academic literature and newest thinking about the topic.

When I started my Finance career way back in the very early 1990s, I came at the topic from a Mathematics perspective because that was the basis of my undergraduate degree.  It’s probable, then, that my selection of books will be influenced by this preference.  Apologies if that is the case.

It’s also important to state that I haven’t purposely gone out to review books for this post and so I may have missed a few that should be here.  If that is the case, please get in touch with recommendations and I’ll update the list accordingly.

General Finance:

There are three textbooks that I think are worthwhile for the  Finance specialist. All cover the same topics, with some variation at the edges. The ones below are the best starting point for anyone wishing to start a finance career.

Warning: As you will see, the first book is my own.  I feel like apologising for this, but I really do think it covers the topics very well for an international reader. I hope this doesn’t put you off reading this article as I’ve been unbiased in all of my reviews.

  1. Corporate Finance (Hillier, Ross, Westerfield, Jaffe, Jordan)

The focus is very strongly on European and International Corporate Finance and based on the most up to date academic research. It also covers Corporate Governance (in detail) and Islamic Finance (in passing), which is in demand in many parts of the world.  I use it for most of my Corporate Finance teaching (unless I am using my other books).

2. Principles of Corporate Finance (Brealey and Myers)

A wonderful book and one of those from which I learned Corporate Finance.  This edition hasn’t been updated since 2013 so it is getting a bit dated.  Even with this caveat, it is exceptionally well-written with real strengths in capital structure theories and application. One of the problems of this book (like many others) is that it is too focussed on the US corporate environment.

3.  Corporate Finance (Berk and De Marzo)

The best thing about this book is its central theme of the Law of One Price that permeates the full text.  It’s an excellent way to bring the theory together and the authors do this very well.  My biggest gripe is that the international edition does very little to vary the US text and so I find it of less use in teaching students in the international context.  The last edition was also 2013 and so like Brealey and Myers, it is getting a bit dated.  If you are happy to overlook this, then the theory is excellent.

Specialist Areas:

Once the reader has understood the main theories of finance from the list above, they will be ready to study specialist areas in more detail.  In the list below, I present what I feel is the best in class for each of the areas.

Warning: I haven’t read every book on Finance and so I may have missed a fantastic text.  If you feel that this is the case, please get in touch and I’ll check out any that you feel should be on this list.

Corporate Governance:

1. International Corporate Governance (Goergen)

Corporate Governance is one of my favourite research areas and I feel that out of all the books available, International Corporate Governance has the best breadth of research, theory and practice.  The book isn’t as long as other textbooks in the area and its last edition was 2012 but it is the most solid and rigorous. Marc is also one of the top corporate governance academics and thinkers in Europe and he knows his stuff.  He’s a very active researcher and you won’t go wrong with this book.

Investments:

1. Investments and Portfolio Management (Bodie, Kane and Marcus)


Without doubt, the best in class.  I use this to teach Investments and Portfolio Theory at university and it is by far the most accessible and insightful text in this area.  It is also good for those wanting to study for the Chartered Financial Analyst (CFA) course.  There is a new US edition that was published in 2014 but this is the global edition (published in 2011).  It might be worthwhile going for the US version given that the Global version hasn’t been updated for a number of years now.

Advanced Finance Books:

These books are for those planning to study at PhD level or above.  I use them not only for doctoral training but also as a basis  for my own academic research.  I do not recommend these for those who have no prior Finance knowledge.

  1. Financial Markets and Corporate Strategy (Hillier, Grinblatt and Titman)

Another of my books.  The main strength of this book is that it combines strategy with finance, which is a major gap in the literature.  It is fairly mathematical but not overly so.  I would also say , though, that the book is getting a bit long in the tooth as it was published in 2011 and so some of the earlier chapters on the financial markets are slightly out of date. The theory hasn’t changed though!

2. Financial Theory and Corporate Policy (Copeland, Weston and Shastri)

I love this book and it was the core of the higher level of textbooks that I read when I was studying Finance as a PhD student.   It explains the main Finance concepts exceptional well and goes into the theory in an accessible way.  My mathematical and theoretical understanding of Finance was helped in so many ways by this book.  The good thing is that it a new edition came out last year, so the material is up to date.

3. The Theory of Corporate Finance (Tirole)

This is a very solid theoretical text on Corporate Finance.  Although it was published in 2010, it hasn’t lost anything of its currency and definitely should be read if you want to understand the mathematical theory of corporate finance.  I promise it isn’t an easy read but well worth it.

4. The Theory of Financial Decision-Making (Ingersoll)

This book nearly killed my career in Finance and it is probably one of the toughest finance books that I have read. During my PhD at Strathclyde, we had to read this cover to cover and I just barely kept up.  However, I did get through the book and I’m so glad I did so.  It’s a shame that it is now out of print but if you can get a copy anywhere, I’d definitely recommend you do so (even if it is just to show off to other finance aficionados!).

4. Foundations for Financial Economics (Huang and Litzenberger)

The second book of my PhD reading and only slightly less difficult than Ingersoll.  It’s a shame that these books are now out of print as they are so important for PhD students to understand how finance really works.

Corporate Finance Course: How to Reduce Your Cost of Capital

Summer has come and gone too quickly and now it’s time for some new videos on Corporate Finance.  In this video, I discuss in a very intuitive way (i.e. non-analytical) how managers can reduce their firm’s cost of capital.  My discussion is practical and so I could be criticised for being atheoretic.  Apologies in advance!

Topics covered:

  • Trade off between cost of capital to the firm and return to investors
  • The Bid-Ask Spread
  • The impact of Liquidity on the Cost of Capital
  • International considerations
  • Other factors that can reduce cost of capital

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Corporate Finance Course: How to Calculate the Weighted Average Cost of Capital (WACC) Using Real Data

It’s been quite a while since I last posted a video for my Corporate Finance course because I’ve been working on finishing the revisions for the 3rd Edition of Corporate Finance.  Finally, they’re all submitted so I can now focus on getting the videos back out.

In this video, I use real data for Carrefour to estimate its WACC.  The approach I use can get you a reasonable figure within about 10 minutes using only data that is readily available on the internet.  It’s also very easy to replicate for any publicly listed company.

Key Points Covered in the Video:

  • Where to get information to calculate WACC
  • How to calculate the cost of equity using real data
  • How to calculate the cost of debt using real data
  • Which tax rate to use and where to find it.

Corporate Finance Course: Firm vs Project Cost of Capital in Capital Budgeting

In this video, I examine the factors that drive the decision to use a firm-level cost of capital against  project-specific cost of capital. The Weighted Average Cost of Capital (WACC) is briefly introduced here before I spend a lot more time on this concept in later videos.

Key Points covered:

  • Firm vs Project Cost of Capital
  • Weighted Average Cost of Capital
  • ArcelorMittal example of calculating the WACC

Corporate Finance Course: The Determinants of Beta

It has been a busy time for me over the last few weeks as I have been finishing the revisions for the 3rd Edition of Corporate Finance.  They’re nearly finished and I’ll be putting updates on the website over time before the book is published. So, apologies for the delay in videos and hopefully I’ll be able to  up the release rate again.

In this video, I discuss the three main determinants of the systematic risk of a company’s equity: Cyclicality, Operating Leverage and Financial Leverage.  These are the three main determinants but, as in all things business, there are many more.

For example, think of a company’s board of directors and their personalities.  It can be easy to come to a conclusion that behavioural issues at the senior level could affect beta.

Key points in the video:

  1. Overview of determinants
  2. Cyclicality
  3. Operating Leverage
  4. Financial Leverage

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Corporate Finance Course: How to Estimate Beta (Systematic Risk) Using Real Data

To estimate the beta of an equity using real data can be fraught with many problems.  The most common approach is to use ordinary least squares regression analysis to find the slope coefficient for the market index.  However, one must choose:

  1. How much data you need;
  2. How long your time period should be in the estimation;
  3. The differentiating interval (i.e., daily, weekly, monthly or annual).

This choice should be based on a variety of factors relating to the company itself, its industry and the macroeconomic environment.  Even then, it may be better to use an industry beta rather than a company beta if your data quality is not particularly good.

In this video, I discuss the issues you face in calculating beta and take you through an example using real data for Unicredit SpA to estimate beta.

Key points in video:

  • The Beta formula
  • Issues and solutions in estimating beta using real data
  • The Regression line and problems with noisy data
  • How to calculate beta using Unicredit SpA as an example
  • Time Variability in Beta and using Rolling betas

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Corporate Finance Course: An Introduction to the Cost of Equity Capital for Project Evaluation

I start off this series of videos on the cost of capital by concentrating on firms that have no debt in their capital structure.  This means that the cost of equity capital is equal to the firm’s overall cost of capital, which makes it easy to calculate.

It’s funny how things change over time.  When I wrote the second edition of Corporate Finance, Kazakhmys was listed on the London Stock Exchange.  Since that time, it delisted from the exchange and became private.  I also updated the example for Societe Generale to reflect new market data.

The video is a nice introduction to estimating the cost of capital and should act as a foundation for the later material that includes debt.

Key Points in Video:

  • The Cost of Capital in an all-equity firm
  • Real case example of how to calculate the cost of capital using Society Generale
  • Using the cost of capital to decide on mutually exclusive investments

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