Roots of Fraudster Over-Borrowing Capitalism

Instead of giving credit to US “finance”, the reason the US stocks have been going up steadily—even in times when they shouldn’t—is because they are corruptly run and doing things they shouldn’t be doing. The stocks of most US companies have been in a bubble since the 80s. They have climbed much higher than they are logically worth. America has been socially sponsoring some of these companies at the cost of accruing a possibly unrepayable national debt. Finance is a sum-negative for an economy because it means a business has to pay an enormous percentage for borrowing money that does not go to paying its own workers. American companies are propped up by purchasing hidden ads on TV shows and the like that puff them without disclosing these are ads. Hollywood sells America’s products to the world by having the largest budgets among production capitals. If raising interests has not slowed the US economy, this probably indicates that its speed is being misreported, or is being inaccurately calculated.
The subtitle of the “Prologue” helps explain the puffing attitude this book instead takes to American corporate finance: “The Magic of Finance Capitalism”. Before US finance was corrupted by folks like Enron and Madoff, it was honestly reflecting America’s lack of intellectual ambition, as the S&P 500 was losing “half its value” in some years. So, what changed was the victory of corporate fraudsters. Some have been caught. The rest are still artificially spiking economic stats. Instead this book claims that “conglomerates”, such as GM, have been a positive because they have been monopolizing broad parts of the market.
I’m not reading any more of this. Columbia had some kind of a glitch with this ebook: it has tiny letters in a poorly formatted pdf. So, it is technically, as well as verbally unreadable.
—Pennsylvania Literary Journal, Fall 2024: https://anaphoraliterary.com/journals/plj/plj-excerpts/book-reviews-fall-2024

One of the most fundamental tasks an economy faces is deciding how best to organize, finance, and operate a business enterprise. As it has developed over more than a century, the academic field of Corporate Finance has had much to say about the myriad challenges involved in making a company run properly. So, what are the optimal theories and practices that define this field? That is exactly the question that author Don Chew attempts to answer in The Making of Modern Corporate Finance, his thought-provoking volume chronicling the development of the leading ideas and applications—as well as the people responsible for initiating them—that form the foundation for understanding how modern companies should be managed and how the successful implementation of those strategies can increase the wealth an entire society through the “magic” of finance capitalism.

An important distinction that Chew makes early on is between “old-fashioned” corporate finance practices and those that mark the transition to a “modern” way of thinking. Essentially, the hallmark of the former was the pursuit of accounting earnings growth and organizational diversification with insufficient regard for the consequences those actions might have on the welfare of the owners of the firm (i.e., the shareholders). Modern practice, on the other hand, is predicated on the notion that each dollar controlled by a company should only be deployed if the expected benefit of the investment exceeds its cost, as measured by the rates of return required to compensate the lenders and owners who provide that financial capital. Although this concept is hardly new or controversial, the author makes a compelling case that it was not the guiding principle for most businesses through the 1970s, despite a substantial amount of theoretical support that had existed for at least a few decades.

The volume is organized into twelve chapters, as well as a Prologue and an Epilogue. Broadly, the topics covered in those chapters can be grouped into three areas: an overview of what corporate finance represents and how it relates to societal wealth; the theoretical developments that form the foundation for modern corporate finance; and applications of these strategies to a host of problems confronting business organizations, including how to compensate employees, how much leverage to use, or how to measure financial performance. While all these sections are engaging on their own, the strength of the book is contained in the chapters highlighting the conceptual underpinnings of modern corporate finance and the people primarily responsible for those intellectual contributions, including the work of such academic luminaries as Merton Miller (the relevance of capital structure decisions, the relationship between financing and investment decisions), Mike Jensen (agency issues, the market for corporate control), Stewart Myers (corporate real options), and Cliff Smith and Rene Stulz (corporate risk management).

The chapters dealing with how companies apply (or misapply, in some cases) these concepts and strategies are also enlightening. Of particular note is the author’s discussion of the development of the private equity market and how firms that are not publicly traded often get their management practices correctly aligned with ownership interests in ways that public corporations do not. Additionally, the chapters delving into the topics of the good and bad sides of CEO compensation policies or why Chinese economic growth and corporate investment practices lead to the illusion, rather than the reality, of wealth creation were interesting and well-reasoned. In fact, the only real misstep in the book—and I am not sure that is even the right word to use here—was the chapter explaining the brief rise and fall of the Economic Value Added (EVA) metric as a replacement for accounting earnings to measure the success for a firm’s operations; given the author was a founding partner at the consulting firm that originally promoted an EVA-based financial management system, this explanation seemed a little too defensive to be regarded as wholly “dispassionate” analysis.

In summary, The Making of Modern Corporate Finance is a thoughtfully organized, thoroughly researched, and well-written treatment of a serious topic that merits far more attention than it has received. It has the potential to do for the field of corporate finance what Peter Bernstein’s classic book Capital Ideas did for the people and ideas central to the development of the investment management area. It is also worth mentioning that Don Chew is almost uniquely qualified to deliver such a volume: as the long-time editor of Journal of Applied Corporate Finance, a periodical devoted to exploring state-of-the-art theory and practice in the field, he has had a front-row seat to how these ideas have flourished over the years and delivered on the promise of enhancing the wealth of nations. It is an easy book to recommend to serious scholars, seasoned practitioners, and curious lay readers alike.

"The Making of Modern Corporate Finance" by Donald H. Chew is an enlightening exploration of the evolution of corporate finance and its critical role in shaping global economic landscapes. With a deep dive into key ideas and thinkers who contributed to the development of modern corporate finance, Chew offers a comprehensive history that not only illuminates the past but also provides insights into the future of economic growth.

Chew’s clear and engaging writing makes complex financial concepts accessible to both experts and novices. He skillfully intertwines historical events like the stagflation of the 1970s and the post-pandemic economic recovery with the evolution of financial theories, demonstrating how these ideas have fueled the wealth of nations. Through his exploration of the "market for corporate control" and the efficient stock market theory, Chew highlights the mechanisms that have created some of the world’s most successful companies and sustained global productivity.

This book also addresses the social implications of corporate finance, asserting that economic efficiency is integral to tackling global challenges like poverty and climate change. Thought-provoking and insightful, "The Making of Modern Corporate Finance" offers valuable lessons on the importance of corporate finance in shaping both the economy and society. It is a must-read for anyone interested in understanding the vital intersection of finance, business, and global development.