Corporate Finance Spring 2025 - Session 5: Closure on the end game and first steps on risk

We started the class by wrapping up the question of at the end game in business, and why I (and you don’t have have to) still trust markets, over managers and expert panels. Markets have no ego, and if allowed to play out, will devise corrections to almost every over reach in business, whether it be managers taking advantage of shareholders, borrowers ripping off lenders, companies lying to markets or creating large social costs. My view is that companies should run to maximize value, but that will involve accepts self-constraints on behavior, and even if the market does not recognize it right away, but that managers need to consider the messages in stock prices. We then moved on to risk and some of you may be regretting the shift from the soft stuff , but trust me that it is still fun.. If it is not, keep telling yourself that it will become fun. Anyway, here are a few thoughts about today's class. 1. The Essence of Risk: There has been risk in investments as long as there have been investments. If you have the time, pick up a copy of Against the Gods by Peter Bernstein, John Wiley and Sons. It is a great book and an easy read. If you want more, you should also pick up a copy of Capital Ideas by Peter as well... That traces out the development of the CAPM.... More on Models: If you want to read more about the CAPM, you can begin with chapter 3 in my book. It provides an extended discussion of what we talked about in class today…. If you don’t have the book, not a big deal! 2. Diversifiable versus non-diversifiable risk: The best way to understand diversifiable and non-diversifiable risk is to take your company and consider all of the risks that it is exposed to and then categorize these risks into whether they are likely to affect just your company, your company and a few competitors, the entire sector or the overall market. Slides: We started the class by wrapping up the question of at the end game in business, and why I (and you don’t have have to) still trust markets, over managers and expert panels. Markets have no ego, and if allowed to play out, will devise corrections to almost every over reach in business, whether it be managers taking advantage of shareholders, borrowers ripping off lenders, companies lying to markets or creating large social costs. My view is that companies should run to maximize value, but that will involve accepts self-constraints on behavior, and even if the market does not recognize it right away, but that managers need to consider the messages in stock prices. Slides: https://nyu.box.com/s/wec06wsxfzeup1n9g1o82tl30h0qnfvb Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session5atest.pdf Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session5asoln.pdf