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The Corporate Finance Email Chronicles: Spring 2016

 


I confess. I send out a lot of emails and I am sure that you don't read some of them. Since they sometimes contain important information as well as clues to my thinking (deranged though it might be), I will try to put all of the emails into this file. They are in chronological order, starting with the earliest one. SThey are in chronological order, starting with the earliest one. So, scroll down to your desired email and read on, or if the scrolling will take you too long, click on the link below to go the emails, by month:

  1. January 2016
  2. February 2016
  3. March 2016
  4. April 2016
  5. May 2016
Date
Email content
1/10/16

Happy new year! I hope you have a wonderful break (good news: it is still break..) and that you will come back tanned, rested and ready to go. This is the first of many, many emails that you will get for me. You can view that either as a promise or a threat. I am delighted that you have decided to take the corporate finance class this spring with me and especially so if you are not a finance major and have never worked in finance. I am an evangelist when it comes to the centrality of corporate finance and I will try very hard to convert you to my faith. I also know that some of you may be worried about the class and the tool set that you will bring to it. I cannot alleviate all your fears now, but here are a few things that you can do to get an early jump:
a. Get a financial calculator and do not throw away the manual. I know that you feel more comfortable using Excel, but you will need a calculator for your quizzes/exams.
b. The only prior knowledge that I will draw on will be in basic accounting, statistics and present value. If you feel insecure about any of these areas, I have short primers on my web site that you can download by going to
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/primer.html
Having got these thoughts out of the way, let me get down to business. You can find out all you need to know about the class (for the moment) by going to the web page for the class:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/corpfin.html
This page has everything connected to the class, including webcast links, lecture notes and project links. The syllabus has been updated:
http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/cfsyllspr16.pdf
You will be getting a hard copy of it on the first day of class but the the quiz dates are specified online. If you click on the calendar link, you will be taken to a Google calendar of everything related to this class.
http://bit.ly/1k0xT2t
You will note references to a project which will be consuming your lives for the next four months. This project will essentially require you to do a full corporate financial analysis of a company. While there is nothing you need to do at the moment for the project, you can start thinking about a company you would like to analyze and a group that you want to be part of.

I will also be posting the contents of the site (webcasts, lectures, posts) on iTunes U. If you have never used it, here is what you need: an Apple device (iPhone or iPad), the iTunes U app on the device and you need to link to the link below:
https://itunes.apple.com/us/course/id1069496447
Like all things Apple, the set up iis very well done and it is neat, being able to catch up on a lecture you missed on your iPad, while browsing through the lecture notes on it too. I know that you are feeling overwhelmed by now, but for those of you with devices and slower broadband, I also have a YouTube Playlist for the class:
https://www.youtube.com/playlist?list=PLUkh9m2Borqls7VGVRN0qpfba4Zdevusi
Please check it out.

Now for the material for the class. The lecture notes for the class are available as a pdf file that you can download and print. I have both a standard version (one slide per page) and an environmentally friendly version (two slides per page) to download. You can also save paper entirely and download the file to your iPad or Kindle. Make your choice.
http://people.stern.nyu.edu/adamodar/New_Home_Page/webcastcfspr16.htm
If you prefer a copied package, the first part (of two) should be in the bookstore next week. There is a book for the class, Applied Corporate Finance, but please make sure that you get the fourth edition. It is exorbitantly over priced but you can buy, rent or download it at Amazon.com or the NYU bookstore
http://www.amazon.com/Applied-Corporate-Finance-Aswath-Damodaran-ebook/dp/B00P6SS6MU/ref=sr_1_1?s=books&ie=UTF8&qid=1421799164&sr=1-1&keywords=applied+corporate+finance+4th+edition
While I have no qualms about wasting your money, I know that some of you are budget constrained (a nice way of saying "poor") . If you really, really cannot afford the book, you should be able to live without it. I can even lend you a copy around quiz weeks.

One final point. I know that the last few years have led you to question the reach of finance (and your own career paths). I must confess that I have gone through my own share of soul searching, trying to make sense of what is going on. I will try to incorporate what I think the lessons learned, unlearned and relearned over this period are for corporate finance. There are assumptions that we have made for decades that need to be challenged and foundations that have to be reinforced. In other words, the time for cookbook and me-too finance (which is what too many firms, investment banks and consultants have indulged in) is over. To close, I will leave you with a YouTube video that introduces you (in about 3 minutes) to the class.
https://youtu.be/ox1ZQ0sbqc8?list=PLUkh9m2BorqnapcQ03A0a_jsbele2kKbp
I hope you enjoy it. That is about it. I am looking forward to this class. It has always been my favorite class to teach (though I love teaching valuation) and I have a singular objective. I would like to make it the best class you have ever taken, period. I know that this is going to be tough to pull off but I will really try. I hope to see you on February 1st, in class.

1/25/16

As the long winter break winds down, I first hope that you are far away from the snow and slush in New York, some place warm. I also hope that you are ready to get started on classes and that you got my really long email a weeks ago. If you did not, you can find it here:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfemail.html
This one, hopefully, will not be as long and has only a few items

1. Website: In case you completely missed this part of the last email, all of the material for the class (as well as the class calendar) is on the website for the class:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/corpfin.html
Please do try to download the first lecture note packet by Monday. The direct link to the lecture note packet is below:
Lecture note packet 1: http://people.stern.nyu.edu/adamodar/pdfiles/cfovhds/cfpacket1spr16.pdf

2. Pre-class prep: Are you kidding me? What kind of twisted mind comes up with a pre-class prep for the very first class. Just relax, have fun this weekend and try to be in class. If you cannot make it, never fear! The webcast for the class will be up a little while after the class, but it just won't be the same as being there in person.

For those of you who have not got around to checking, class is scheduled from 10.30-11.50 in Paulson Auditorium on February 1. See you there!

1/30/16

I don’t know whether you signed up for this, but class has not even started and this is the third email that you are getting from me (if you missed the last two, check this link: http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfemail.html). However, since class is just around the corner, I decided to send you both a final reminder and to perhaps give you some advance warning about what’s coming in these next few weeks.

  1. The details: The class details are simple. We will meet every Monday and Wednesday from 10.30-11.50 in Paulson Auditorium, starting February 1st and going through May 9. If you have been to Paulson Auditorium already, it was probably as part of Stern Launch, those two weeks of fun, frolic and intellectual stimulation (I am trying so hard to bite my tongue here that I think I bit it off)!. This is about as bad a setting as Madison Square Garden, but unlike the New York Knicks, we will make even this setting work. My advice to you is to try to avoid the back rows on the side of the room (front and center is always best), since they come with both limited view seats and bad acoustics. As for what you need to bring to the first class, the only essential is that you be there, awake and curious, but if not, I will take alive and caffeinated. If you can check the webpage for the class (http://www.stern.nyu.edu/~adamodar/New_Home_Page/corpfin.html), it would be great, and it would be awesome if you can print off the lecture note packet 1 for the class (available at this link, http://www.stern.nyu.edu/~adamodar/New_Home_Page/cflect.htm ) or buy it at the bookstore.
  2. “The only class that matters”: I know that you have other classes on your schedule but I will apologize in advance for acting as if this is the only class that you will be taking this semester. I will give you stuff to do in this class that will eat into your time in other classes, and in the process, I may be laying waste to your marketing, strategy and management classes, but since there is not much to lay waste too, I won’t be losing any sleep over these transgressions and I hope that you don’t either.
  3. Micro aggressions aplenty and a few macro aggressions too: If you are easily troubled by micro aggressions, you will either be mortally wounded by this class or will develop a thicker skin. I plan to commit multiple micro aggressions every class and will find fault with entire professional groups, starting with accountants, moving on to strategists and then turning on finance professors. In fact, I expect to be committing macro aggressions against other groups, especially bankers and consultants. Since many of you fall or fell into one of these groups, it is only a matter of time before you get really pissed off about something I say. Sorry, in advance, but I cannot stop myself. I have a version of Tourette’s that leads me to blurt out these things!
  4. Dish it back: I also follow the adage that if you dish it out, you should be willing to have it dished back to you. Nothing would make me happier than to have you disagree with me, as long as you marshal your facts and back it up with arguments. This class is not about making you think like me (the world would be such a boring place) but to help you think for yourselves, on the big corporate finance and investing questions of the day.
  5. You cannot wait? You want to get started now? If you are in this much of a hurry to get started, you may need some psychological counseling, but if you really want to get a jump on this class, you can play some Moneyball with me. At the start of every year, I collected and analyze data on every publicly traded company in the world. This year, that sample included 41,889 companies and my findings are on my blog as seven posts, structured very much like the class. You can find them at http://aswathdamodaran.blogspot.com and they are the seven posts in January. Just browse through them all when you get a chance..

See you on Monday! I hope that this class will excite you, but if that fails, I will settle for provoke, even anger or incite you, but I hope never to bore you. That, too me, is the one unforgivable teaching sin.

2/1/16

I promised you with a ton of emails and I always deliver on my promises... Here is the first of many, many missives that you will receive for me….. First, a quick review of what we did in today's class. I laid out the structure for the class and an agenda of what I hope to accomplish during the next 15 weeks. In addition to describing the logistical details, I presented my view that corporate finance is the ultimate big picture class because everything falls under its purview. The “big picture” of corporate finance covers the three basic decisions that every business has to make: how to allocate scarce funds across competing uses (the investment decision), how to raise funds to finance these investments (the financing decision) and how much cash to take out of the business (the dividend decision). The singular objective in corporate finance is to maximize the value of the business to its owners. This big picture was then used to emphasize five themes: that corporate finance is common sense, that it is focused, that the focus shifts over the life cycle and that you cannot break first principles with immunity.

On to housekeeping details.
1. Project Group: I have not described the project yet, but you don’t have until Wednesday to get started. For the moment, try to at least find a group that you can work with for the rest of the semester. Find people you like/trust/can get along with/ will not kill before the end of the semester. The group should be at least 4 and can be up to 8 (if you can handle the logistics). Each person will be picking a company and having a larger group will not mean less work. This group will do both a case and the project, both of which I will talk about next class.
2. Webcasts: The webcasts should be up a few hours after the class ends. Please use the webcasts as a back-up, in case you cannot make it to class or have to review something that you did not get during class, rather than as replacement for coming to class. I would really, really like to see you in class. The web cast for the first class is up now and you can get it at
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr16.htm
Try it out and let me know what you think. I have been told that it come through best if you have a 50 inch flat panel TV and surround sound. You will also find the syllabus and project description in pdf format to download and print on this page. The lecture note packet is also on this page. If you were not able to come to class today, because of weather issues (or anything else), here are the links to the syllabus and project that were handed out:
Syllabus: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/cfsyllspr16.pdf
Project: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/cfproj.pdf
3. Drop by: I know this is a large class but I would really like to meet you at some point in time personally. So, drop by when you get chance... I don't bite....
4. Lecture note packet 1: Please bring the first lecture note packet to class on Wednesday. If you want to buy it at the bookstore and the bookstore does not have it, just print off the first 15 pages for Wednesday’s class. Here is the link to lecture note packet 1.
Lecture note packet 1: http://people.stern.nyu.edu/adamodar/pdfiles/cfovhds/cfpacket1spr16.pdf
5. Past emails: If you have registered late for this class and did not get the previous emails, you can see all past emails under email chronicles
on my web site
http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfemail.html
6. Post class test & solution: Each class, I will be sending out a post class test and solution for each class. This is just meant to reinforce what we did in class that day and there are no grades or prizes involved. I am attaching the ones for today's class.
That is about it, for this email.

2/2/16

I know that it is the first week of this class but it is never too early to start thinking creatively. This week’s puzzle is built around the corporate life cycle structure that I introduced in class yesterday, and particularly around what to do with Microsoft. Start by reading the description of the puzzle:
http://people.stern.nyu.edu/adamodar/New_Home_Page/cfpuzzles/cfspr16puzzle1.htm

If you have the time, do read the two blog posts referenced in the puzzle:
http://aswathdamodaran.blogspot.com/2015/12/aging-in-dog-years-short-glorious-life.htm
http://aswathdamodaran.blogspot.com/2015/12/the-compressed-tech-life-cycle.html
As I thought about companies to offer to you to examine, i wanted to stay away from the obvious ones: Snapchat is obviously a very young company, Facebook and Google are growing mature companies and Apple is probably a mature company. I picked Microsoft, a company where there can be debate about where they are in the life cycle and what to do next. So, put yourself in the shoes of Microsoft’s CEO and think about what you would do, if you ran the company. In particular, I want you to think about what would make the most sense for Microsoft’s stockholders and then think about what would advance your personal capital the most and decide. Have fun with it. There is no right answer but I opened a discussion board on YellowDig (for which I sent out an invitation earlier today). So, please go back and accept that invitation and post your thoughts.

2/3/16

In today's class, we started on what the objective in running a business should be. While corporate finance states it to be maximizing firm value, it is often practiced as maximizing stock price. To make the world safe for stock price maximization, we do have to make key assumptions: that managers act in the best interests of stockholders, that lenders are fully protected, that information flows to rational investors and that there are no social costs. We started on why one of these assumptions, that stockholders have power over managers, fails and we will continue ripping the Utopian world apart next class.

1. Administrative Stuff: I went through the structure for the class and mentioned the quiz dates. As noted in class, if you are going to miss a quiz, the 10% from that quiz will be moved to the rest of the exam grade for the class and if you take all three, your worst quiz will get marked up to the average on your remaining exams. Here are a few other details:
Class announcements: I will allow one announcement at the beginning of each class, limited to two minutes. If you are interested in making an announcement, please use this Google shared spreadsheet to sign up. (Link: https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1SbapcKe2AwgZ63v9FaVSux_nK4pQDEK3viHxXH_LXnc/edit?usp=sharing )
Orphan list: If you have trouble finding a group, I have started the orphan list at this link. (https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1ZQhI4GzHT4DJSN4RGBUvy7r_I3QLl545nqm6VG5Z-ts/edit?usp=sharing ) Please go sign up. I filled in the first row with my information but I am not really interested in being part of a group or being adopted.
Yellowdig: For those of you who have already accepted my invitation to be part of Yellowdig (https://www.yellowdig.com), thank you. If you have not, please do go back to yesterday’s emails and check for the invite. If you cannot find it, I will send it to you again.

2. Other People's Money: Just a few added notes relating to the class that I want to bring to your attention. The first is the movie Other People's Money, which is one of my favorites for illustrating the straw men that people like to set up and knock down. You can find out more about the movie here:
http://www.imdb.com/title/tt0102609/
But I found the best part on YouTube. It is Danny DeVito's "Larry the Liquidator" speech:
https://www.youtube.com/watch?v=Uundu-aPiBQ
Watch it when you get a chance. Not only is it entertaining but it is a learning experience (though I am not sure what you learn). Incidentally, it is much, much better than Michael Douglas's "Greed is good" speech in the first "Wall Street " which was a blatant rip-off of Ivan Boesky's graduation address to the UC Berkeley MBAs in 1986 (which I happened to be at, since I was teaching there that year).

3. DisneyWar: In next week’s session, I will be talking about the dysfunctional state of Disney in the 1990s. If you want to review these on your own, try this book written by James Stewart. It is in paperback, on Amazon:
http://www.amazon.com/DisneyWar-James-B-Stewart/dp/B000W3W6NO
If you are budget-constrained, you can borrow my copy and return in when you are done. (I have only one copy. First come, first served)

4. Company Choice: On the question of picking companies for your group, some (unsolicited) advice:
(1) Define your theme broadly: In other words, don't pick five airlines as your group. Pick United Airlines, Southwest, Singapore Airlines, Travelocity and Embraer.... Three very different airline firms, a travel service and a company that supplies aircraft to the airlines.
(2) Do not worry about making a mistake: If you pick a company that you regret picking later, you can go back and change your pick.... If you do it in the first 5 weeks, it will not be the end of the world.
(3) If you are leery about picking a foreign company, pick one that has ADRs (these are Depository Receipts that are traded in US dollars) listed in the US. It will make your life a little easier. You should still use the information related to the local listing (rather than the ADR).
(4) If you want to sound me out on your picks, go ahead. I have to tell you up front that I think that there is some aspect that will be interesting no matter what company you pick. So, do not avoid a company simply because it pays no dividends or has no debt.
(5) If you want to kill two birds with one stone, pick a company that you already own stock in or plan to work for or with .....
As a final reminder. Please pick your company soon... As you can see from today's class, we are getting started on assessing your company…

If you want to print off the financial statements for your company, I would recommend that you start with the annual report for the most recent year. You should be able to pull it off the website for the company, under investor relations. If you want to keep going, and it is a US company, go to o the SEC site (http://www.sec.gov). If it is a non-US company, you will have to find the equivalent regulatory body in your country. For some of your companies, you will find less data than on others. Don’t fret. This too shall pass. More on this in tomorrow’s email.

2/4/16

It is never too early to start nagging you about the project. So, let me get started with a checklist (which is short for this week but will get longer each week. Here is the list of things that would be nice to get behind you:
Find a group: If you have trouble finding one, try the orphan spreadsheet for the class. If you have a group and need an orphan to adopt, try the spreadsheet as well. Orphan Spreadsheet: https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1ZQhI4GzHT4DJSN4RGBUvy7r_I3QLl545nqm6VG5Z-ts/edit?usp=sharing
Pick a company/theme: This will require some coordination across the group but pick a company and find a theme that works for the group. Each person in the group picks a company and the companies form the theme.
Find the most recent annual report for your company.
If your company has quarterly reports or filings pull them up as well.
Get a listing of the board of directors for your company & start your preliminary assessment.
In doing all of this, you will need data and Stern subscribes to one of the two industry standards: S&P Capital IQ (the other is Factset). It is truly a remarkable dataset with hundreds of items on tens of thousands of public companies listed globally, including corporate governance measures. I believe that you have automatic access to Capital IQ. Just make sure you do. You will not regret it and it will not only save you lots of time in the future but will give you another weapon you can use in analysis.

On a different note, I want to update you on three TAs for the class, their office hours and the review sessions that they are planning to hold.
Tyler Albright, tyler.albright@stern.nyu.edu, Office hours: Tuesday 11-12
Charlotte Baranne, cb3271@stern.nyu.edu, Office hours: Tuesday: 5-6
Ramandeep Singh, rs5058@stern.nyu.edu, Office hours: Tuesday 4.30-5.30
They plan to have a review session every week on Wednesday from 4.45- 5.45 in KMEC 3-55. Since the room fits only about 60 people, I have set up a Google sign up spreadsheet for the classes, if you are interested in attending. The sessions will take problems from past quizzes and work through them in sync with what is going in class.
Google sign up sheet: https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1Gcs0Dp5vm4M2IaNK-94oZLPGZL2I2ghn_Wq6Vk9VMqY/edit?usp=sharing

2/5/16 As promised, here is the first of the weekly in-practice webcasts. These are 10-15 minute webcasts designed to work on practical issues in corporate finance. This week’s issue is a timely one, if you are working on picking companies for your project (as you should be..). It is about the process of collecting data for companies, the first step in understanding and analyzing them. The webcast link is below:
http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/gettingdata.mp4
I don’t think it is too painful to watch and you may even find it useful. I have also put the link up on the webcast page for the class:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr16.htm
The webcasts for the first two classes should be on there, if you missed (physically, metaphysically or mentally) and the links to the project and syllabus that I handed out in the class. At the risk of nagging, please do get the lecture note packet 1 printed off or bought before Monday’s class. It is now available (or was at least yesterday) in the bookstore.
2/6/16

The sun is out and I hope that you are enjoying your weekend. I won’t ruin it with a long email but the first newsletter is attached. Not much news but it provides some perspective on where we are (not far) and where we are going.

Attachment: Issue 1 (February 6)

2/7/16 As you get ready for the Super Bowl party, a quick preview of the week to come. This week, we will continue with our discussion of corporate governance, focusing first on where power in a company rests (stockholders, managers, labor, the government) and the consequences for corporate finance. We will then move on to lenders/bondholders and how left unprotected, they can be exploited, and on to financial markets, examining both the predilection of firms to delay/manage bad news and investor reactions to it. Having laid bare the limitations of the assumptions that underlie traditional corporate finance, we will examine alternatives to stock price maximization. In Wednesday’s class, we will start on the big question of what comprises risk, how to measure it and convert it into a hurdle rate. Have fun and I hope that you enjoy watching the game as much as you do assessing the quality of the advertising.
2/8/16

Today's class extended the discussion of everything that can wrong in the real world. Lenders, left unprotected, will be exploited. Information can be noisy and markets can be irrational. Social costs can be large. Relating back to class, I have a couple of items on the agenda and neither requires extensive reading or research. I would like you to think about market efficiency without any preconceptions. You may believe that markets are short term, volatile and over react, but I would like you to consider the basis of these beliefs. Is it because you have anecdotal evidence or because you have been told it is so or is it based upon something more concrete? i also want to think about how managers in publicly traded companies can position themselves best to consider the public good, without being charitable with other people's money, as a precursor to the next class. We have spent a couple of sessions being negative - managers are craven, markets are noisy and bondholders get ripped off. In the next class, we will take a more prescriptive look at what we should be doing in this very imperfect world. As always, reading ahead in chapter 2 will be helpful.

I hope that your search for a group has ended well and that you are thinking about the companies that you would like to analyze. Better still, perhaps you have a company picked out already. If you do, try to find a Bloomberg terminal (there is one in the MBA lounge and there used to be one in the basement)... If you do find one vacant, jump on it and try the following:
1. Press the EQUITY button
2. Choose FIND YOUR SECURITY
3. Type the name of your company
4. You might get multiple listings for your company, especially if it is a large company with multiple listings and securities. Try to find your local listing. For a US company, this will usually be the one with your stock symbol followed by US. For a non-US company, it will have the exchange symbol for your country (GR: Germany, FP: France, LN: UK etc...) It may take some trial and error to find the listing....
5. Type in HDS
6. Print off the first page of the HDS (it should have the top 17 investors in your company).

If you cannot find a Bloomberg terminal or don't have access to one, try going on Yahoo! Finance and type in the name or symbol for your company. Once you find your company, find the tab that says Holders and click on it. You should get a listing of the top stockholders in your company. In fact, while you are on that page, take note of the percent of your company's stock held by insiders and by institutions. I have also attached the post class test and solution for today's class.

Attachments: Post-class test and solution

2/9/16

It is Tuesday and time for the second weekly challenge. In the utopian world, maximizing a company's stock price is equivalent to maximizing it's value, since markets are efficient. But what if they are not? What if markets are driven by short term considerations and investors? In that case, maximizing prices is not the same as maximizing value. This puzzle is built around a letter than Laurence Fink, head of Blackrock, sent to the S&P 500 companies advising them to play the long game. The details of the puzzle are at the link below:
http://people.stern.nyu.edu/adamodar/New_Home_Page/cfpuzzles/cfspr16puzzle2.htm
After you have read the puzzle, here are the five questions that I would like you to start thinking about, since it is a perfect preview for tomorrow’s class:

  1. Do you think that investors are collectively guilty of being short term in their thinking? What evidence can you offer to back this up?
  2. If yes, who do you think is more short term? Instiutitional investors or individual investors? Any evidence?
  3. Are managers at companies more long term or more short term than investors? Why?
  4. Mr. Fink is suggesting that if companies don't tell compelling stories about where they are going, investors will step in and fill in the details. Do you agree with this statement? If yes, what is the solution?
  5. If your end game is a more efficient market (where value and price converge), and you were a top public policy official or a politicians running for high office, what changes would you propose to market regulations, tax laws and investor rights to make this happen?
    There is a YouTube video that goes with this puzzle (https://youtu.be/TCPrxsx5DMQ) and I have put it up on YellowDig (Did you accept my invitation yet? You can still do it). Please go in and tell me what you think about these issues on the YellowDig discussion board.
2/10/16

The objective function matters, and there are no perfect objectives. That is the message of the last two classes. Once you have absorbed that, I am willing to accept the fact that you still don't quite buy into the "maximize value" objective. That is fine and I would like you to keep thinking about a better alternative with three caveats. First, you cannot cop out and give me multiple objectives - I too would like to maximize stockholder wealth, maximize customer satisfaction, maximize social welfare and employee benefits at the same time but it is just not doable. Second, your objective function has to be measurable. In other words, if you define your objective as maximizing the social good, how would you measure social good? Third, take your objective (and the measurement device you have developed) and ask yourself a cynical question: How might managers game this system for maximum benefit, while hurting you as an owner? In the long term, you may almost guarantee that this will happen. On the theme of investor time horizon and stockholder composition, here is an interesting read: http://bit.ly/YrNIMX
Building on the theme of social good and stockholder wealth a little more, there are a number of fascinating moral and ethical issues that arise when you are the manager in a publicly traded firm. Is your first duty to society (to which we all belong) or to the stockholders (who are your ultimate employers)? If you have to pick between the two and you choose the former, do you have an obligation to be honest and let the latter know? What if you believed that the market was overvaluing your stock? Should you sit back and let it happen, since it is good for your stockholders, or should you try to talk the stock price down? On the question of socially responsibility, there are groups out there that rank companies based upon social responsibility. I have listed a few below, but they are a few of many:
Ethisphere (never heard of them): http://ethisphere.com/worlds-most-ethical/wme-honorees/
Calvert Social Index: http://www.calvert.com/sri-index.html
Domini: http://www.kld.com/indexes/ds400index/index.htm
Dow Jones Sustainability Index: http://www.sustainability-indices.com
And this is just the tip of the iceberg. Environmental organizations, labor unions and other groups all have their own corporate rankings. In other words, whatever your key social issue is, there is a way to stay true (as a consumer and investor).

If you have picked a company, there are two orders of business you have for this weekend:
a. How much power do you as an individual stockholder have over the management of this company?
To make this assessment, you want to start by looking at the board of directors and examining it for independence and competence. I know that there are lots of unknowns here, but work with at least what you know - the size of the board, the appearance of independence, the (perceived) quality of these directors. With US companies, you can get more information about the directors from the DEF14 (a filing with the SEC that you can get from the SEC website). With non-US companies, you may sometimes find yourself lacking information about potential conflicts of interests, but what you cannot find is often more revealing than what you can find out; it points to how little power stockholders have in these companies. Also look at subtle ways in which power is shifted to managers at the expense of stockholders including anti-takeover amendments (poison pills, golden parachutes), if you can find reference to them.
b. Are there other potential conflicts of interests between inside stockholders and outside stockholders?
In some companies, you will find that there are large stockholders in the company who also play a role in running the company. While this may make you feel a little more at ease about managers being held in check (by these large stockholders), consider who these large stockholders are and whether their interests may diverge from yours. In particular, the largest stockholder in your company can be a founder/CEO, a family holding, the government or even employees in the company. What they might want managers to do may be very different from what you would want managers to do... Look for ways in which these inside stockholders may leverage their holdings to get even more power (voting and non-voting shares for inside stockholders, veto powers for the government...)
While it may seem like we are paying far too much attention to these minor issues, I think that understanding who has the power to make decisions in a company will have significant consequences for how the company approaches every aspect of corporate finance - which projects it takes, how it funds them and how much it pays in dividends. So, give it your best shot... On a different note, we will be continue with our discussion of risk on Wednesday (no class on Monday). As part of that discussion, we will confront the question of who the marginal investor in your company is. If you have already printed off the list of the top stockholders in your company (HDS page in Bloomberg or the Major Holders page from Yahoo! Finance), bring it with you again. If you have not, please do so before the next class. Also, watch for the in-practice webcast day after tomorrow, because I will go through how to break down the HDS page.

Finally, I mentioned a paper that related stock prices to corporate governance scores in class today. You can find the link to the paper below:
http://pages.stern.nyu.edu/~adamodar/pdfiles/articles/corpgovstockprice.pdf
In closing, though, I know that the sheer size of the class and the setting make it intimidating for participation. I understand but I hope that (a) you will feel comfortable enough to make your views heard, even if they are violently at odds with mine and (b) that you talk to me in person or by email about specific issues that we are covering in class that you may not understand or have a different perspective.

This email has gone on way too long already, but one final note. A little more than a year ago, I took a look at Petrobras, just as a cautionary note on what happens to a company when its objective function becomes muddled (with national interest constraints). You can read it here.
http://aswathdamodaran.blogspot.com/2015/02/how-low-can-you-go-doing-petrobras-limbo.html

I am also attaching the post-class test & solution for this session.

2/11/16

As for the project & class, time sure does fly, when you are having fun... We are exactly 15.38% (4 sessions out of 26) through the class (in terms of class time) and we will kick into high gear in the next two weeks. I am going to assume for the moment that my nagging has worked and that you have picked a company to analyze. Here is what you can be doing (or better still, have done already):
1. Download the latest financials for the company: You don't have to print them off. In fact, I find it convenient to keep them in a folder in pdf format, since my computer can search the document far more quickly than I can. For all companies, this will include the latest annual report and with US companies, try to find the latest 10K and 10Q on the SEC website. If you are analyzing a private business, you will need to get the most recent financial data from the owner (who hopefully is related to you and still likes you...)
2. Put the board of directors under a microscope: The first step in understanding your company is to start at the top. Take a look at who sits on the board and how long they have been sitting there. In particular, the question that you are trying to answer is how effective this board will be in keeping any eye on the top management of the company. Start with the cosmetic measures, which is what most corporate governance services and laws focus on, but look for something more tangible. Has the board shown any backbone in stopping or slowing down management?
3. Assess the "power" structure: As Machiavelli pointed out, power abhors a vacuum (he said no such thing, but you can pretty much attribute anything to him or Confucius and sound literate). Specifically, try to find who the largest stockholders in your company are. You can get this from the Bloomberg terminals (HDS page), Capital IQ (holders) or online for free (Yahoo! Finance or Morningstar). Once you have this list, here are the questions that you should try to answer:
If you are a small stockholder in this company, do you see any likelihood that any of these stockholders will stand up for stockholder rights or are they more likely to sell and run?
Are there any stockholders on the list whose interests may lie in something other than maximizing stockholder wealth? (For instance, we talked about the government as a stockholder and how its interests may be different from that of the rest of the stockholders.. Think of an employee pension fund being on that list... Or another company being the largest stockholder...)
As I mentioned yesterday, I will be putting up a webcast tomorrow on how to analyze the "top shareholder" list, using a range of companies. Hope you to get a chance to watch it. Since we have no class on Monday, you should have plenty of time. For those of you have tried to get on Capital IQ and have been unable to, I have good news. I heard back from the powers-to-be that the class has been added to the Capital IQ list and you should be able to logon and download data. Let me know if you have any trouble.

On a related note, I will not keep tabs on your company choices officially, since I leave the choice up to you and will let you live with the consequences. It would be interesting though (to me and to everyone else in the class), if we could see the choices. So, I am opening a shared Google spreadsheet for you to use to enter the names of the people in your group and the company choices that you have made.
https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1l7K0OC7qJD8ygN2LglwUlweUEtbxuW-WtzJW5SpX9qE/edit?usp=sharing
Remember that nothing is set in stone and that you can always change your company at any time (even as late as May 8, if you so desire). I also have a couple of lost souls who have no groups. So, if you need or would like an extra person for your group, please let me know.

2/12/16

Since you have a long weekend ahead of you, with nothing to do but binge watch The Walking Dead (ahead of the season opener on Sunday), I thought I would get in two in-practice webcasts this week and nag you about your project (yet again). Since these webcasts are directly connected to what you will or should be doing on the project, the best way to use them is to pick a company and use the webcasts to get the relevant parts of the project done.

1. Assessing Corporate Governance: This webcast looks at ways to assess the corporate governance at your company, using HP from 2013 as an example. I use HP's annual report, its filings with the SEC and other public information to make my assessment of the company.
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/corpgovHP.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/corpgov.ppt
HP Annual Report: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/HPAnnual.pdf
HP 14DEF: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/HPAnnual.pdf
You can find these links in all three forums (my webcast page, Yellowdig, iTunes U) and it looks at what information to use and how to use it to assess the corporate governance structure of a company. (Sorry about the striped sweater… Should have known better).

2. Stockholder Holding Assessment: This webcast is on assessing who the top stockholders in your company are and thinking through the potential conflicts of interest you will face as a result. The webcast went a little longer than I wanted it to (it is about 24 minutes) but if you do have the list of the top stockholders in your company (the HDS page from Bloomberg, Capital IQ, Morningstar or some other source), I think you will find it useful.
Webcast link: http://youtu.be/x_H_4KTeOkc
Presentation link: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/holders.ppt
Finally, one hopeful sign for investors is the presence of activist investors (like Carl Icahn) in your midst, not because they always do the right thing but because they put managers on notice. To help you determine whether you have an activist investor in your listing, I have a link (dated, but it is the best I could do) that lists the activist investors in the US (with phone numbers, if you ever want to call them):
http://www.niri.org/Other-Content/Top200HedgeFunds.aspx

Finally, if you do get a chance, please reflect and comment on the weekly challenge (on YellowDig) and enter your group details in the shared Google spreadsheet (https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/17uwl0LZutgAs2KtCf1N2qnGEnSve2iPGX-XydjIWoBg/edit?usp=sharing). I do have a couple of people who have had trouble finding groups. So, if you have room for one more person in your group, please let me know.