elements Of Finance.netÓ
Shareable Resources for Teaching
& Learning
Especially but not exclusively for learners of the arts &
Sciences, Technology, Engineering, Mathematics, and financial economics
(aSTEMfe)
Ø Writings by prof-td@elementsOfFinance.net
0. View the elements Of Finance book: http://elementsoffinance.net/elements.pdf
. My active
long-term writing project: http://elementsoffinance.net/palette.pdf
1. Learn that the modeling of economic value as
the discounted value of expected flows rests upon a firm foundation described
more than a century ago, never abandoned, made stronger ever since.
http://elementsoffinance.net/support/average_period_user_cost_and_term_structure.pdf
.
This
unpublished article models economic intrinsic value from environmental parameters
within the user cost of capital. Prof-JMKeynes declares in The General Theory that the
user cost constitutes a link between the present and future.
2. Learn how penny stocks and extreme outcomes
provide evidence for the share market lottery premium predicted by Allan
Greenspan.
http://elementsoffinance.net/support/jpm_lottery.pdf
This article, co-authored with Quan Wen,
shows that returns on average lag for penny stocks but for a few there
sometimes, like lottery tickets, are some really huge winners!
3. Learn that variation in risk-sharing
(risk-aversion) between creditors and shareholders affects the shape of the
yield curve.
http://elementsoffinance.net/support/neoclassical_term_structure.pdf
This unpublished paper introduces
diversification benefits from investment as a source of wealth for the risk
premium sustaining financial markets.
4.
See that a complex modeling and measuring of industry level intrinsic
values and stock prices enables predicting the magnitude of differential
responses to changes in tax policy.
http://elementsoffinance.net/support/aer_stock_prices.pdf
A surprising yet fundamental finding is
that the responsiveness of company intrinsic value to a change in the cost of
capital may be positive or negative and depends on a ratio of elasticities –
namely the interest elasticity (a.k.a., duration) of the return streams for the
marginal investment relative to that for the total assets. An increase in the cost of capital is
commonly thought to definitively depress intrinsic value – wrong! When the ratio of interest elasticities
exceeds unity, a plausible scenario in some market settings, then company
intrinsic value rises when the cost of capital rises (and vice versa), a
proposition otherwise unknown in the literature. This article is co-authored with Hassan
Tehranian.
5. This study, co-authored with
dissertation advisor Patric Hendershott, examines the effect of changes in
federal tax law on the intrinsic value of U.S. Non-financial corporate capital.
http://elementsoffinance.net/support/ntj_tax_policy.pdf
An early draft of the study was presented
by prof-td at the National Bureau of Economic Research Summer Workshop Series
on Mass. Ave. Cambridge in the strip between MIT and Harvard to a dozen
distinguished profs including the moderator Martin Feldstein (NBER President),
Mervyn King, Jonathan Leape, Alan Auerbach, Larry
Summers, and of course prof-Pat! A few
months later prof-td picked up the ringing home phone to hear the voice “Hello,
this is Fischer Black,” then a Goldman-Sachs VP and forevermore the MIT prof
that laid a firm foundation for standardized option markets. Though answering the phone with a poopy baby
diaper in-hand, the 45-minute conversation with Fischer prompted by the study
remains a cherished & inspirational event in the 47-year academic career
that prof-td (to-date) has been enrolled or employed at universities of higher
learning.
6.
Learn how three generally accepted accounting models that measure the
economic value for a fixed asset stock all derive from the same fundamental
specification. The historical
replacement cost model measures historical investment flows net of accumulated
depreciation. The current replacement
cost model extends the specification to account for incremental information on
cumulative specific price inflation. The
intrinsic value model that prof-td specifies accounts for incremental
information on inflation, taxes, capital accumulation histories, and capacity
depreciation schedules that shape the aggregate company cash flow stream. This study also finds that actual used
corporate asset prices track measurements of intrinsic values better than
historical cost or current cost measurements.
http://elementsoffinance.net/support/jar_fundamental_value.pdf
The study, co-authored with Keith Shriver,
was presented by prof-td at the University of Chicago Graduate School of
Business annual conference hosted by the Institute for Professional
Accounting. A favorite moment for
prof-td occurred when discussant prof Ralph Sansing (Yale) after the
presentation said that the biggest criticism is that the valuation model lacks
a decision making context. Editor Katherine Schipper (UChicago) replied
that the model is immune to the criticism since the intrinsic value
specification has “a dimension of timelessness”.
7.
Learn that the often referenced consumer theory
of value initially described more than a century ago has been extended to
support specifications of asset return generating processes. Namely, the supply price of financial capital
embeds the well-known required risk premium as compensation to capitalists for
bearing risk. Learn that the other half
of the process is the producer theory of value described initially more than a
century ago that has been extended to support specifications of intrinsic
value. Namely, the demand price for real
capital embodies expected returns based upon economic information about
discounted cash flows.
http://elementsoffinance.net/support/producer_theory_of_value_and_equilibrium_stock_returns.pdf
The surprise of this unpublished paper may
be that the producer theory of value supports complex specifications for
intrinsic value and expected returns conditioned on available information. When properly discounted expected cash flows
provide an intrinsic value measurement then market competition assures that
required risk premia measurements from the consumer theory of value vibrate see
Prof-P.Samuelson 1965)
randomly, unpredictably, around those information-based expected returns. Prof-B.Malkiel
wrongly writes in A Random Walk Down Wall Street that risk and risk
alone determines the level of equilibrium rates of return. Risk and risk alone, however, determines the
required risk premium added to the risk-free rate. Thus it is that risk
determines only the required rate of return.
Information and information alone determines
the expected rate of return. Efficient
markets force the spread between required and expected returns to narrow down
to the core.
8.
This unpublished study explains interest rates by focusing on the zero
net present value equilibrium condition in the market for real assets. The
analysis relies on a user cost of capital framework that incorporates debt
maturity structure. Since the existence of market equilibria implies that the
net present value of the marginal investment is independent of the financing
method, the user costs for alternative debt contracts are equal. The user cost
specification therefore implies a determinate relationship between interest
rates on alternative debt contracts. .
http://elementsoffinance.net/support/embodied_equity_theory_of_term_structure.pdf
Analysis of the user cost specification
reveals that the equilibrium interest rate is an increasing function of the
debt contract's loan-to-value ratio and average period (i.e., duration) of
debt. The basic reason why the interest rate increases with average period is
this: the equity financing rate exceeds the interest rate,
a lengthening debt average period reduces to equity the discounted cost of debt
and the financing rate increases to re-establish equilibrium. The “embodied
equity” hypothesis advanced herein joins the expectations hypothesis, the
liquidity preference hypothesis, and the market segmentation hypothesis as a
fundamental explanation for the upward slope on the yield curve.
9. This study models and measures
industry level intrinsic values, an approach that focuses on the asset side of
the balance sheet. The ratio of industry
market capitalization to intrinsic value, dubbed the overvalue ratio, leverages
rates of return independently of required risk premia measures focused on the
liability side of the balance sheet.
Namely, for a $1 change in intrinsic value the resultant shareholder
rate of return is smaller for an overvalued industry (or company) and bigger
for an undervalued company irrespective of risk factors or preferences.
http://elementsoffinance.net/support/jpm_asset_valuation.pdf
This article was
presented by prof-td at the Wall Street Quantitative Investment workshop hosted
annually by Institutional Investor, a prestigious trade journal. Only 2 profs presented at the 1-day program,
prof Ken French (Dartmouth) was the keynote speaker presenting the Fama-French
seminal work on Book-to-Market ratios and multi-factor risk models. Speakers and attendees mostly were Wall
Street workers from around the USA. For
prof-td being assigned a seat at the lunch table beside Martin Leibowitz
(TIAA-CREF) gave opportunity to offer gratitude to Marty for Investing, a classic Leibowitz book
that provides enduring lessons. In a
brief back-stage chat, prof-td conjectured to prof-Ken that the explanatory
power of the Book-to-Market ratio (=Stockholders’ equity to market cap) likely
has little to do with being a risk factor and more to do with the leverage
effect associated with being inversely correlated with the overvalue ratio
(=market cap to intrinsic value).
10.
This unpublished paper analyzes a specification for the user cost of
capital that generalizes the time-path of pretax cash flow. That innovation reveals substantively
important implications for interpretation and measurement of marginal effective
tax rates. The standard assumption of
geometric capacity depreciation obfuscates relations between tax effects, rates
of return, and discounted cash flows.
http://elementsoffinance.net/support/marginal_effective_tax_rates.pdf
A novel and surprising finding is that the
marginal effective tax rate depends on discounted tax deductions and is
invariant to asset characteristics such as service life or time-paths of pretax
cash flow and economic depreciation are irrelevant. The pretax cash flow equilibrates through the
user cost of capital to underlying asset characteristics thus maintaining a
zero net present value of after-tax cash flows.
11. This study, co-authored with Robert
Ingram, replicates the seminal Fama-French research that relates the
cross-section of stock returns to firm size, beta, and total risk. Fama-French find that size relates positively
with average returns, and beta doesn’t, a result we replicate. Extending the analysis, however, finds that
as the extreme 2% of stock returns are censored with trimmed least squares that
the explanatory power of firm size persists only in flat to falling
markets. Systematic risk relates
positively in up-markets and negatively in down-markets, an outcome consistent
with the Sharpe-Lintner-Black capital asset pricing model for beta. We also find that average returns relate
negatively with total risk. The
reduction in average return associated with an increase in total risk
presumably reflects the price investors willingly pay for a chance at an
unlikely extreme return.
http://elementsoffinance.net/support/jfr_risk_return.pdf
The 43 associate editors at Journal of
Financial Research selected this article as the Best of the Year and kindly
sent prof-td and prof-Rob a $5,000 prize to share.
12.
This study is one of just a handful in the literature that model the
economic value of nonfinancial corporate assets to establish that the
well-known Tobin’s Q-ratio (= market cap to current replacement cost) may
systematically and routinely deviate from unity due to differences in the
timing of expected after-tax cash flows.
Still, empirical evidence shows little incremental explanatory power
from using tax-adjusted Q-ratios instead of standard unadjusted Q-ratios.
http://elementsoffinance.net/support/jpub_tax_bias.pdf
13.
This unpublished paper, coauthored with Cűneyt
Demirgűreş, examines country funds trading
on the NYSE or AMEX comprised of common stocks trading on foreign
exchanges. We find high positive
correlation among premiums for country funds and conclude a "foreign-fund
investor sentiment" is systematic to all country funds. Premiums and domestic market indexes correlate
positively for funds investing in developed-economies (which largely
concentrate in the hands of individual investors) and negatively for funds
investing in developing-economies (which primarily are held by institutions). Returns on country funds and domestic indexes
correlate positive irrespective of ownership structure. These results suggest that foreign and
domestic investors use different information in setting asset prices thus
giving support to the investor sentiment hypothesis.
http://elementsoffinance.net/support/investor_sentiment_closed_end_country_funds.pdf
14.
Learn how market capitalizations for public utility industries relate to
measurements of underlying asset values.
Current replacement cost measurements (CC) of those assets contain
specifiable biases of economic value that depend on capital accumulation histories,
capacity depreciation schedules, tax depreciation schedules, and cost of
capital components. An intrinsic value
model provides estimates that show the bias contains incremental information
beyond that inherent with the CC measurements.
http://elementsoffinance.net/support/ntj_utility_valuation.pdf
This study was awarded the $5,000 prize
sponsored by the National Tax Association and the Public Utility and Railroad
Workshop at Wichita State University for the Distinguished Award in Applied
Research.
15.
http://elementsoffinance.net/support/debt_maturity_and_cost_of_capital.pdf
16.
http://elementsoffinance.net/support/tfr_capital_budgeting.pdf
17.
http://elementsoffinance.net/support/tfr_tax_reform.pdf
18.
http://elementsoffinance.net/support/tfr_tax_shields.pdf
19.
http://elementsoffinance.net/support/jecb_user_cost.pdf
20. The
Effects of Inflation and Taxation on the Value of Capital
21.
http://elementsoffinance.net/AlgorithmicDocumentGenerator.pdf
The free add-in below for Microsoft Excel can create a new algorithmic document in MS Word useful for nearly any topic or
purpose. Package personalized
learning content into algorithmic setups embodying random redraws of worksheet
cells. Cells might contain a number,
word, or an alphanumeric phrase/sentence/paragraph made from other cells! Endless options to uniquely redraw
algorithmic scenario setups give teachers and students alike lots of choices.
Click http://elementsoffinance.net/Algogen.xla to download the add-in for Excel.
Better yet, first peruse this documentation below then download the add-in! http://elementsoffinance.net/AlgorithmicDocumentGenerator.pdf
Installation Instruction #3 in the above pdf describes how to activate two Excel add-ins
– the free Algogen add-in above and the Analysis Tool-Pak add-in from Microsoft. Completing that step (only) empowers Word
& Excel with Algogen wizards that help package your content into
algorithmic scenario setups, a potentially high return on invested time that
enhances teaching and learning effectiveness and efficiency. Find examples, hints, and more in the
documentation. For example, the first
pages present an analysis of student learning outcomes with multiple attempt
algorithmic online quizzes, multiple attempt algorithmic paper exams submitted
in class and/or online. The sample
includes thousands of students with varied teachers and course formats
(traditional, hybrid & online registrants).
All students populated one common undergraduate core course learning
community. All were challenged by the
same set of algorithmic assessments.
All software
resources listed herein are authored by prof-td@elementsOfFinance.net
and are available “as-is” subject to terms in the End User License agreement (EULA).
No liability nor benefit accrues to prof-td or elementsOfFinance.net
LLC by your use of these resources.
No harm is intended, either.
Hopefully you find unbelievably huge reductions in exam preparation time – for me the 18 hours per exam dropped down to
2 hours, a savings that accrued 4 times a semester (more than a complete
workweek)! The Algogen
app that prof-td uses even analyzes scantron results, transfers course
data, and makes a Standings page showing all student scores, publicly viewable
and anonymous, from 1st rank to last. Everyone knows the performance outcomes of
everyone else, anonymously. With a
handful of clicks Algogen made the prof a
complete 25-question exam with 4 unique versions ready for duplication onto
paper for classroom use. The procedure
also transfers the 25 answers for the 4 exam versions into the gradebook.xlsx
ready for the eventual Algogen click that
processes the scantron data, no matter how large or small the class. One semester more than 1,200 students
populated one common core course learning community with prof-td.
Not every
teacher wants to make easy tests
but every teacher wants
to easily make tests.
Ø Get the free
Algogen app that allows you to select finance
scenario setups from documents in an algorithmic content collection and make
countless new versions for purposes like quizzes, exams, assignments,
presentation examples, or for making algorithmic online practice scenarios or
assessments, at
http://elementsOfFinance.net/Algogen.zip
Documentation provides installation instructions and more: http://elementsoffinance.net/AlgorithmicDocumentGenerator.pdf .
Ø Get the free
algorithmic content collection written for the elements Of Finance
book at
http://elementsoffinance.net/elements.zip