As you know, there is a phenomenal amount of material on the web. This page will include links to articles and other information which I have found and which may be of interest to you. I have sorted the articles by lecture topic. Some lectures won't have supplementary readings.

  1. Lecture 1: Corporate Finance Overview
    • Ketchup Economics or the Economics of Ketchup. Several years ago, an economics professor at Harvard (Lawrence Summers) was explaining to a reporter the difference between an economics professor and a finance professor. Economics professors, he said, study the economics of ketchup - what determines supply and demand, and thus, the price and quantity of ketchup. Finance professors study ketchup economics - they try to explain why two bottles of ketchup cost twice as much as one bottle of ketchup. This was his interpretation of arbitrage arguments behind Black-Scholes and Modigliani-Miller. If you find efficient markets confusing, this paper discusses efficient markets as it applies to grocery shopping as well as international financial markets. If you have questions about what Professor Lamont is saying, please feel free to post them. I found the article both interesting and amusing (although this may say more about my sense of humor than anything else).
    • Shareholder Value in Germany. The idea that managers should maximize shareholder wealth has been less visible and maybe less prevalent in Germany. If we are to believe the financial press, however, this is changing. Enclosed are figures from a PhD student in MORS, Peter Fiss, who is examining the increased discussion of shareholder value in Germany. The figures show the increased use of the words "Shareholder Value" in the German financial press and the increased discussion of Shareholder Value in the annual reports of German firms.
    • 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?
    • 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, though still positive, gains from international diversification.
    • A Hedge Fund Falters, So the Fed Persuades Big Banks to Ante Up. This is the first in a series of articles about the collapse of Long Term Capital Management by a group of banks that was orchestrated by the Federal Reserve Bank of New York. LTCM is a group of high-tech traders that have been very successful - until now. The firm is also populated by a number of current and former academics. Thus, its fortunes may have repercussions in the academic job market.
    • How a Big Hedge Fund Marketed Its Expertise, Shrouded Its Risks. Second in a series of articles on LTCM.
    • John Meriwether's Letter to Investors. A copy of the letter sent by John W. Meriwether, Chief Executive Officer of Long-Term Capital Management, to the company's investors. Mr. Meriwether is also one of the stars of "Liar's Poker".
  2. Lecture 2: Cash Flow Forecasting
  3. Lecture 3-4: Discount Rates: Cost of Capital
    • Current Yield Curve. This is the current yield on government bonds from several countries.
    • Coupon versus Promised Rates. What coupon rates do firms actually choose? These results are based on research from Kellogg faculty.
    • 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, which is well below the 11% hurdle rate it once proclaimed as its benchmark.
    • Discount Rates for Leases. This article describes Xerox’s restatement of their earnings and sales from their Mexican copier leasing business. They were clever in their use of discount rates. There is also a supplementary exercise that lets you construct the numbers from the WSJ article.
  4. Lecture 5: Financial Options
  5. Lecture 6: Real Options
    • Real Options Class. Although I am not currently teaching the class, I have kept the syllabus up in case you are interested in what this class might/did cover. The prerequisite was Derivatives I.
    • Getting Real. CFO Magazine, November, 1999. Article contains quotes from CFOs and consultants about why real options are superior to NPV. Do their arguments makes sense? Notice, most have the flavor that if you do NPV correctly (real options) you get a better answer than if you do NPV incorrectly.
  6. Lecture 7: Dividend Policy Irrelevance
  7. Lecture 8: Capital Structure Irrelevance
    • Debt Maturity. In theory, the maturity of debt issued by firms can be of any length. In practice, bank debt tends to be shorter and publicly issued bonds tend to be longer. The enclosed pictures have the distribution of maturities for bonds issued by publicly traded firms in the U.S.
  8. Lecture 9: Capital Structure Revelance: Taxes
  9. Lecture 10: Capital Structure Relevance: Costs of Financial Distress
    • Inside the Fuyo Keiretsu. Financial Times, October 28, 1998. This discusses the financial troubles of the members of one of the Japanese Keiretsus.
    • The Federal Express Story - A Real Example of Risk Shifting. You should not take from this story that professors don't know a good idea. It is instead 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.
    • Xerox Experiences Financial Distress. WSJ, December 5, 2000. Due to business problems (increased competition and difficulty collecting bills), Xerox finds itself short of time. A possible downgrade to its debt makes this a less than desirable time to be raising additional capital. Thus, Xerox may turn to asset sales to raise cash. With a current equity value of about $3.2B, Xerox is looking to sell $2B to $4B of assets. Note on Debt Ratings: Baa is like BBB and Ba is the same as BB. BBB/Baa is the lowest investment grade rating. Since many derivatives like swaps are priced only for investment grade counter-parties, if you fall below investment grade, the swaps may have to be closed out or additional collateral put up to insure against default. We will discuss swaps in Lecture 13 and the GM case. If you want more information on debt ratings, you can look at S&P's or Moody's web site.
  10. Lecture 11: Capital Structure Relevance: Security Mispricing
    • Buyback Binge Now Creates Big Hangover. Remember the assumptions. When we go over the model in class, the assumption is that managers maximize old (remaining) shareholder value (Notice Mr. Buffet understands buy backs are a trade between two groups of shareholders). They do this by buying their stock back when it is cheap ("We do our buybacks when the stock is low and not high"). What happens if managers know less than the market? What happens if managers get caught up in the hype and buy back their stock for more than it is worth? This article discusses some of the implications. For those of you with short memories, history repeats. The episodes of the last two years (1999 and 2000) will be repeated several times in your life time.
    • Small Stock Performance Suffers From Oversupply. WSJ, July 31, 1998.
  11. Lecture 12: Risk Management
    • Risk Management in the Airline Industry. Fuel costs are a significant fraction of airlines' cost structure. In addition, they can be highly variable. Thus, the question of whether airlines should hedge their fuel risk is an interesting and important one. I have enclosed two newspaper articles that discuss the hedging or lack of hedging in the industry. One is from 1990 and the other is from 2004. Notice how much progress we have made in almost 15 years.
    • Earnings Insurance. If managers are concerned about the volatility of their earnings, why go through the trouble of manipulating your earnings with accounting tricks. Just buy earnings insurance. The enclosed editorial discusses a new insurance product to be offered by Reliance National. Since it takes an interesting idea to a ridiculous extreme, I like it. Plus, I would love to see how this product works (or not ;-)).
    • Swap Agreement. This is a copy of a generic swap agreement that a customer (a non-financial firm) would sign with its bank.
  12. Lecture 13: Security Design and Financial Innovation
    • Term Sheets. When banks issue securities, they distribute term sheets that contain the basic details for the security. These are term sheets for a convertible bond and a convertible preferred equity offering. Notice the covenants that are included in the documents. These are trying to prevent the shareholders from doing bad things to the bond or preferred owners. The convertible bond is different from 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. The prior version (1999) 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 another product issued by another bank (PRIDES by Merrill). Remember, if it is a cat name (PRIDES, STRYPES, LYONS, Feline), it’s a Merrill product.