- Introduction
- Agency Problems and Corporate Governance
- Stakeholder Capitalism and Responsible Business
- Credit Risk and the Value of Corporate Debt
- The Many Different Kinds of Debt
- Leasing
- Managing Risk, Options
- International Financial Management
- No Lecture
- Financial Analysis
- Financial Planning, Working Capital Management
- Treasury at Holcim / Amrize Case
- Mergers
- Corporate Restructuring
- Financial Crises and Regulatory
Introduction
“Every decision made in a business has financial implications, and any decision that involves the use of money is a corporate financial decision. Defined broadly, everything that a business does fits under the rubric of corporate finance. It is, in fact, unfortunate that we even call the subject corporate finance, because it suggests to many observers a focus on how large corporations make financial decisions and seems to exclude small and private businesses from its purview. A more appropriate title for this discipline would be Business Finance, because the basic principles remain the same, whether one looks at large, publicly traded firms or small, privately run businesses. All businesses have to invest their resources wisely, find the right kind and mix of financing to fund these investments, and return cash to the owners if there are not enough good investments.”
(Damodaran, 2025)
First Principles: maximize the value of the business:
-
The investment Decision
- the hurdle rate should reflect the skiness of the investment
- the return should reflect the magnitude and the timing of the cash-flows
-
The Financing Decision
- the optimal mix of debt and equity that maximize firm's value
- the right kind of debt matches the tenor of the firm's assets
- The Dividend Decision: if the firm cannot find a investment that meets its minimum acceptance rate, return the cash to the owners
- How much cash you can return depend on the current and potential opportunities
- How you choose to return the cash to the owners will depend wheter they prefer dividends or buybakcs
Corporate Finance is not a perfect science!
It applies mathematical models and statistics but interprets and tests them in a real-world economic and behavioral contexts.
Recall that the finance goals of the corporatio are, from the stockholders' point of view:
- maximize current wealth
- transform wealth into most desirable time pattern of consumption
- manage risk characteristics of the choosen consumption plan
But... how do cash flow between financial markets and the firm's operations?
Recall that, in presence of such cash-flows, the Net Present Value (NPV) is defined as:
- NPV depdens only on the forecasted cash flows and the opportunity cost of capital
1. Agency Problems and Corporate Governance
The agency problem is defined as a conflict of interest inherent in any relationship when one party is expected to act in another's best interests.
In particular, the principal-agent problem is a conflict of interest that occurs when an agent (manager) authorized to act on behalf of a principal (owner) pursues their own self-interests rather than maximizing the principal's goals
Agency costs reduce firm value due to agency problems:
- value lost because managers do not maximize the value of the firm
- costs of monitoring managers and intervening when problems arise.
Principals agency problems come from:
- not put in sufficient efforts
- use cash on perks and private benefits
- over-invest in search of power and prestige
- be reluctant to take risks or take too many risks
- focus on short-term results at the expense of long-term value
In the corporate world, Boards of Directors exist to solve this problem.
In particular, in the US and the UK, boards are composed as follows:
- One single board with outside non-executive directors and inside executive directors (CEO, CFO) to provide the board with necessary expertise and information about the firm.
- The majority of the directors has to be indipendent according to NYSE and NASDAQ (in practise, around 85% are independent) to ensure that the people monitoring the managers aren't also friends with them or financially dependent on them.
- It should not be too big to generate a free-rider problem and not too small to be unable to handle the complexities.
- Directors should not sere too many boards.
- Annual elections for a share of the board, some directors are not changed yearly.
On the other hand, shareholders can also play a strong role in monitoring the firm with three main tools:
-
Voting
- Binding versus Advisory votations
- Proxy fight (aggressive move where an activist shareholder tries to replace the current board by persuading other shareholders to use their "proxy" votes and vote on behalf of another.)
- Dual-Class Equity when some shares (usually held by founders) have more voting power (example: 10x, 100x) of "normal" shares.
- Engagement
- Governance through exit from the company
Auditors monitor the firm ensuring consistency with generally accepted accounting principles (GAAP):
- in case of no problems: document certifying that the financial statements fairly represent the company's financial conditions
- in case of problems:
- Qualified option: accounts have not fully acted according to GAAP
- Adverse option: accounts violate many GAAP rules.
Moreover, lenders usually track company's asset. Takeover involves funding the acquisition of a target company, typically through cash, debt, equity issuance, or a mix of these methods when assets are not being used efficiently.
2. Stakeholder Capitalism and Responsible Business
Stakeholders are individuals, groups, or organizations with a vested interest in, or who are affected by, the actions, decisions, and success of a project, company, or organization
- employees
- customers
- suppliers
- local and regional communities
- the enviroment
- the government
The Case for Shareholder Capitalism
Milton Friedman in 1970 with its article The Social Responsibility of Business is to increase its profits rejected stakeholder capitalism and argued that a company’s only responsibility is to its the shareholders:
“.....there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Friedman's argument is based on three points:
- maximizing shareholder value requires to invest in stakeholders and take them seriously
- government policies ensure companies will engage in socially responsible behavior
- maximizing shareholder value gives shareholder maximum freedom to support the social objectives they care about.
With that, Friedman also pointed out that it is in the companies' self interest to invest in their local community and proposed that all future cash flows should be included into the NPV calculation, including those arising through stakeholders.
According to this view, since prosperity depends on profits and externalities and externalities are usually addressed by laws and government, the market cannot police itself regarding social harm; that is the job of the state.
In other words, the government sets the "rules of the game.", then the company plays to win (maximize profit) within those rules.
From the individual investor's perspective, each person has his own values and social goals, so the management should just give the shareholder the maximum amount of money and leave him with maximum flexibility on how to spend it.
This is called Enlightened Shareholder Value (ESV) Theory that, from a practical point of view, has two main advantages:
- it provides a clear criterion for making investment decisions (positive NPV)
- it proivides a clear criterion for judjing performances (stock price).
Violations of Friedman's assumptions may justify stakeholder capitalism:
- Assumption 1: well functioning governments:
- government may be influenced by lobbying
- elections are not very frequent
- regulation cannot regulate qualitative issues effectly (negative externalities are not priced!)
- Assumption 2: companies have no comparative advantage in serving society
- companies have comparative advantages in activities they control
- companies have comparative advantages in expertise
- Assumption 3: investing in stakeholders is instrumental and functiona to increase profits
- it's impossible to calculate the return of investing in stakeholders
In reality, investing in stakeholders splits the pie in short-term but grows it in the long-term in ways that could not be predicted (uncertainty, NPV calculation,..) and, at the end, both shareholders and stakeholders are better off than before
The potential advantage of stakeholder capitalism is that allows managers to pursue stakeholder interest even if doing so can't be justified by an NPV calculation.
However, this causes:
- no clear rule to replace NPV
- accountability to everyone means accountability to no one.
Moreover, there's arbitrariness at least regarding two dimensions:
- weighting: how much shareholders vs stakeholders value
- comparability: how to measure shareholder value (USD) vs staekeholder value _(salary, happines, enviroment etc...)
Responsible Business
Responsible business lies at the middle between shareholder and stakeholder capitalism.
- It creates value for shareholders by creating value for society ç(with an explicit duty to shareholders)_
- While Corporate Social Responsibility relates to non-core activites (donations, philantropy), responsibl business is about the core activites of a firm.
- Guiding Principle: create vaue for society and at least don't reduce shareholder value significantly.
- Principle of Multiplication: does an investment in a stakehlder generate a greater benefit?
- Principle of Comparative Advantage: can the company deliver more value through an activity than others?
- Principle of Materiality: are the stakeholders an objective of the company's business?
Generally speaking, some firms tie CEO and management's pay to ESG targets, so the company is more aligned and motivated to hit them. In 2023, 76% of S&P500 firms linked executive pay to at least one ESG target.
However, the CEO may focus only on the metric and miss the point. Secondly, it's an extrinsic, not intrinsic, motivation: CEOs focus on ESG target because they earn a bounus, rathen than care really about the enviroment.
To ensure that companies are being run responsibly, ESG rating agencies provide an overall assessment of a company's ESG performance, similar to how credit agencies apply a reding on creditworthiness, however:
- ESG ratings are inconsistent. The correlation between ratings of two different agencies are, on average, 0.28-0.71; compare do 0.9 for credit ratings.
- 38% is casued by the use of different attributes
- 56% is due to measurement
- 6% is due to weigh: different providers place different importance on individual indexes/components of the rating.