In search of New Foundations _ Luigi Zingales

Transcript:In search of New Foundations _ Luigi Zingales:
In search of New Foundations _ Luigi Zingales Prepared By – Deepika Chhillar Spring 2021 Key Arguments and Contributions Corporate Finance is deeply rooted in an underpinning theory of the firm Existing theories of the firm have fallen short of explaining recent changes in the nature of the firm Establishes the need for a new theory of the firm and outlines its characteristics Five Sections of this Article I – Analyzes what corporate finance is about and why it assumed this name II – Explains why the name carried important consequences for the type of research that has been done and the type of problems that has been ignored. III – Discusses how corporate finance is deeply rooted in an underpinning theory of the firm and illustrates the implications for corporate finance of the most important theories of the firm. IV – Argues that although the existing theories have delivered very important and useful insights, they seem to be quite ineffective in helping us cope with the new type of firms that is emerging. V – Outlines the characteristics that a new theory of the firm should satisfy and suggests how such a theory could change the way we do corporate finance, both theoretically and empirically. Section I Corporate Finance (CF) – Study of the way firms are financed OR the business of financing business. Distinct from real estate finance, personal/consumer finance etc. Three main areas of CF: Capital Structure – Distortions associated with different ways of financing Corporate Governance – Optimal governance structure for the firm Valuation – Valuation of the firm Section I & II - Origins of Corporate Finance Concerns the financing of enterprises, that is, unique combinations of physical and human capital For historical reasons, the idea of enterprise that became ingrained in corporate finance coincided with the legal notion of corporation Disproportionate focus on large firms – Disproportionate amount of research dedicated to large publicly traded companies is simply an effect of data availability The access to datasets, such as COMPUSTAT, facilitated this type of research, whereas the difficulty in obtaining information about privately held companies prevented the other type Section III – Theory of the firm foundations of CF (I/II) Why do we need this link? Many unanswered questions: Capital Structure Perspective - Why value is lost in liquidating a firm  Why a firm is worth more than the sum of all its