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)
Writings by prof-td@elementsOfFinance.net
The elements Of Finance book: http://elementsoffinance.net/elements.pdf
My active project: http://elementsoffinance.net/palette.pdf
The list includes both manuscripts published in
journals and a selection of unpublished manuscripts
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This unpublished manuscript models the economic
intrinsic value of a balance sheet from environmental parameters within the
user cost of capital. Prof-JMKeynes declares in The General Theory (1936) that
the user cost constitutes a link between the present and future. It’s all about time and it’s well known that
time is money. For far too many their mind’s on their
money and their money’s on their mind!
2. Learn how penny stocks and extreme outcomes
provide evidence for the share market lottery premium that Allan Greenspan
predicted.
http://elementsoffinance.net/support/jpm_lottery.pdf
This
article, co-authored with then Ph.D. student 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unpublished paper introduces diversification benefits from investment as a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 that sustains the growth of financial
markets.
4.
See that a complex modeling and measuring of the intrinsic value for a
balance sheet enables mapping intrinsic value to public policy in general and
to tax policy changes in particular.
http://elementsoffinance.net/support/aer_stock_prices.pdf
A
fundamental finding is that the responsiveness of balance sheet intrinsic value
to a change in the cost of capital (also know as the
discount rate) may be positive or negative and depends on a ratio of percentage
changes, that is an interest elasticity (a.k.a., duration) of the return
streams for marginal investments relative to that for total assets. When the ratio of elasticities exceeds unity,
a plausible scenario in some market settings, then company intrinsic value
rises with a rising cost of capital and falls with a falling cost of capital, a
proof otherwise unknown in the literature.
An increase in the cost of capital is commonly thought to definitively
depress intrinsic value – wrong! Thanks
to Boston College co-author Hassan Tehranian that handed me the excess stock
return numbers in this article that fortuitously aligned with my predicted
changes to intrinsic value. I vividly recall him comparing his numbers to my
predictions while stating “but how did you know” – priceless. I am even more grateful to HT for the
introduction outside my BC office door to Professor Billy Helms visiting
momentarily from the University of Alabama who, unbeknownst at the time, would
very soon offer me more than a quarter century of guidance, growth opportunities,
friendship, and mission within the Department of Economics, Finance, and Legal
Studies in home sweet home Tuscaloosa.
5. This study, co-authored with Patric
Hendershott, Head of my dissertation committee at Purdue University. The manuscript examines effects on the
intrinsic value of U.S. Non-financial corporate
capital from policy changes enacted through federal tax law.
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. A dozen distinguished profs participating included 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 before heading to BC, the 45-minute
conversation with Fischer prompted by his read of this study remains a
cherished & inspirational event in my half century with universities of
higher learning.
6.
Learn about three financial accounting methods for valuing fixed asset
stocks extend from the same fundamental specification. The historical replacement cost method
measures historical investment flows net of accumulated depreciation. The current replacement cost method extends
to account for incremental information on cumulative specific price
inflation. The intrinsic value method in
this article accounts for general inflation, taxes, capital accumulation
histories, and capacity depreciation schedules.
http://elementsoffinance.net/support/jar_fundamental_value.pdf
Thanks
to co-author Keith Shriver for suggesting comparison of his data for actual used
fixed corporate asset prices to the valuations from the three valuation
methods. I presented our findings at the University of Chicago Graduate School
of Business annual conference hosted by the Institute for Professional
Accounting. Actual used corporate fixed asset prices track intrinsic valuations
better than historical cost or current cost measurements. A happy learning moment occurred when
discussant prof Ralph Sansing (Yale) having said that the intrinsic valuation
method lacks a decision making context received a
reply from Editor Katherine Schipper (UChicago) that the method is immune to
this criticism because the intrinsic value specification has “a dimension of
timelessness”. That declaration of the timelessness dimension is keen! A scary
learning moment occurred when audience member Richard Leftwich (UChicago)
requested from me clarification for the effects on intrinsic value of asset
specific price inflation versus aggregate inflation. The explanation for that
insightful question likely links the consumer theory of utility insights from Chipman
and Moore on the Wealth of Nations (1972) with the producer theory of value
insights from the Dale Jorgenson derivations of National Wealth (1982) from the
flow of funds and capacity utilization.
7.
Learn that the often referenced consumer theory
of value initially described more than a century ago supports 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 supports
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
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 randomly and unpredictably around those
information-based expected returns (Bachelier 1893, 1906 and Samuelson 1965). Prof-B.Malkiel
wrongly writes in A Random Walk Down Wall Street (1968) that risk and
risk alone determines the level of equilibrium rates of return. Correction: Risk and risk alone determine 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 determine the expected rate of
return. Efficient markets force the
spread between required and expected returns to narrow down to the core (Stoll
1976).
8.
This unpublished study incorporates debt maturity structure into
intrinsic value by focusing on the zero net present value equilibrium condition
in the market for real assets. Market equilibria implies
that the net present value of the marginal investment is independent of the financing
method therefore user costs for alternative debt contracts equilibrate. 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 debt
duration (its elasticity a.k.a. average period). 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 fundamental explanations
for the normal 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 at the Helmsly Hotel,
prof Ken French (Dartmouth) was the keynote speaker presenting the Fama-French
seminal work on Book-to-Market ratios and multi-factor risk models published a
few months later in the Journal of Finance.
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 his book Investing, a classic that provides
enduring lessons for use in class or at work.
In a brief back-stage chat, prof-td conjectured to prof-Ken that the
explanatory power of the Book-to-Market ratio (=Stockholders’ equity divided by
market cap) likely has little to do with being a risk factor and more with
being inversely correlated to the overvalue ratio (=market cap divided by
intrinsic value). He didn’t think that was funny. Me neither.
10.
This unpublished paper analyzes a specification for the user cost of
capital that reveals fundamental implications for interpretation and
measurement of marginal effective income tax rates.
http://elementsoffinance.net/support/marginal_effective_tax_rates.pdf
A
novel and surprising finding is the marginal effective income tax rate is
invariant to asset characteristics such as service life and capacity
depreciation through equilibration by the user cost of capital that maintains a
zero net present value for marginal investments. The findings echo Prof-Samuelson (1964)
regarding the invariance of intrinsic value to the marginal income tax rate.
11. This study, inspired and coauthored
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.
My first publication is the only manuscript that uses continuous time calculus.
All other manuscripts and the book use discrete period mathematics. The manuscript
below is the most downloaded writing besides the book which tops all.
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.
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 .
Get the free algorithmic content collection written
for the elements Of Finance book at http://elementsoffinance.net/elements.zip