. 2025. Donald H. Chew, Jr. Columbia University PressAvailable February 2025.
The subtitle, “a story of ideas and how they help to build up the wealth of the nations”, aptly describes the narrative arch of the book when it really works chronologically by 4 “core subjects”:
- The company decision
- The company decision
- Pursue
- Company and investor
According to a chapter study on Japan, which effectively links the financing of corporations and social assets, the story begins with Franco Modigliani and Merton Miller’s work within the late Nineteen Fifties and early Nineteen Sixties through “capital structure and dividends -stairvanance”. Instead of capital structure, investors should focus on profitability – investments in projects that no less than earn their capital costs – and the way corporate risks are managed. If the capital structure is a red herring, the main target can also be on short -term result per share (EPS). Chew offers a superb example: investors who focused on quarterly EPS numbers and never on future profitability at Amazon.
The writer follows his robust opening with a discussion about Michael Jensen and William Meckling Well -cited paper With regard to the agency costs of skilled management for the interests of the economic owners, ie the shareholders. Management is to grow on the corporate control market as a substitute of concentrating on profitability. This led to corporate takeovers in several sectors and the bloated conglomerates of the Seventies, which in turn promoted the rejection of control by Leveraged Buyouts (LBOS) and at last private equity.
The high interest payments imposed by the external financing of LBOs have redirected the eye of management from the acquisitions to operational efficiency. The corporate structure for Private Equity (PE) removed the difficulty of Jensen and Mecklings agency by controlling the board seats or the elimination of goal corporations from public markets.
With every theoretical development – Modigliani and Miller, Jensen and Meckling and Stewart Meyers, who contributed to this, Rene Stulz, whose work showed the importance of corporate risk management as a vital a part of maximizing shareholders – there have been practitioners to make use of the brand new tools. The practitioners included company management, the Bennet Stewart’s concept of “Economic Value Add” (EVA), which led to a shift in responsibility from a central EPS deal with the varied operating units and a deal with profitability.
Modern company financing also included a brand new edition of the company incentive structure for managers. Chew asserts if managers are paid by PE owners equivalent to owners (keep in mind that this contributes to the undeniable fact that the agency problems are equipped) needs to be paid in an analogous way by public corporations. If the salary structure and amount are inadequate, public corporations will turn into mere training grounds for the very best managers, as they’re on the lookout for superior payment as part of personal equity. Chew discusses the optimal structure of long -term incentives intimately.
The previous paragraphs convey a sense for the structure and content of the book. However, the overarching narrative is of the economic power of the United States – not the accrued capital or its military strength, but of monetary innovation and dynamics. The opening chapter via Japan is booked by a final chapter about China and the differences between its economic system and that of the United States. So far, Chen claims, the Chinese economic system has not excluded its promise since it has exchanged innovation and dynamics for state control – a facade of western capital markets, but without substance.
Examples from history and geography are stimulating. For example, between the Seventies, conglomerates and today’s technology corporations may be drawn, which each synergies, e.g. B. alphabet and promoting in addition to silos equivalent to AWS and online sales portal from Amazon in several business areas.
Have the managers of those corporations solve the agency edition identified by Jensen and Meckling and developed higher government and more disciplined management? Many have two class release structures that turn closer to the PE model, but as Chew notes, the effect may be limited in time. The shareholders can accept the start-up control in periods with superior growth, but support a possible turn on a one-shape regime with a vote.
Could the expansive reach of the technology giants reflect other aspects equivalent to market concentration and monopoly or oligopoly returns? This is clearly a special topic than the address of Chew sets (see Tim Wus Buch). A second row of questions arises when Chew combines the high US stock market reviews with the country’s financial dynamics. While he’s making a convincing case, market historians will find that the premiums of the US and international stock markets are beaten forwards and backwards over time.
During your complete book, Chew emphasizes the prevalence of the US model and the ability of corporate financing to be able to create prosperity and relieve ecological and social problems. For this purpose, he features a thoughtful discussion about ESG questions and its relevance for corporations and board members. Sometimes his comments are too wide and categorically rely on the role of corporations when coping with questions and the role of the federal government in the supply of the foundations and the infrastructure. Many of the questions arose primarily from company activities and should not have been addressed without stakeholders or government measures to force the issues.
This is somewhat criticism, for the reason that attention of the book for details, thoughtful and appealing structure and vigorous anecdotes. What could be a dry textbook in less capable hands is with Chew’s expert touch, an exquisite historical overview of corporate financing and the continued priority of the United States. If you liked earlier work on risk and capital markets by Peter Bernstein, you will certainly enjoy.
