The hottest Corporate Finance Substack posts right now

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Top Finance Topics

Equity Risk Premiums: The 2011 Edition

Musings on Markets • 0 implied HN points • 25 Feb 11
💰 Finance Investing Risk management Corporate Finance Market Analysis Valuation Investment Risk management Corporate Finance Market Analysis Valuation
  1. The equity risk premium is how much more investors expect to earn from stocks compared to risk-free investments. It's influenced by how investors feel about the market.
  2. There are three main ways to estimate the equity risk premium: surveying people's opinions, looking at historical data, and calculating future expectations based on current stock prices.
  3. Which equity risk premium to use depends on your situation. If you’re assessing a company based on current market conditions, use today's implied premium; long-term investors can take a broader view.

Dividend Policy for the 21st century

Musings on Markets • 0 implied HN points • 18 Feb 11
💰 Finance Investment Corporate Finance Dividends Stock Buybacks Economic Policy Investing Dividends Corporate Policy Market Trends Economic Factors
  1. Companies are often hesitant to cut dividends because it sends a bad signal. They prefer to keep dividends stable, even if their earnings fluctuate.
  2. With more global competition and uncertainty, sticking to fixed dividends might lead to lower payouts as companies retain more cash for safety.
  3. There are alternative dividend policies, like tying dividends to earnings or cash flow, which give companies more flexibility and can reduce the risks of being locked into high payouts.

The Shift to Buybacks: Implications for investors

Musings on Markets • 0 implied HN points • 01 Feb 11
💰 Finance Investing Stock Markets Dividends Corporate Finance Risk management Investing Markets Corporate Finance Stock Buybacks Dividends
  1. Many companies are moving from paying dividends to doing stock buybacks. This means fewer stocks will pay dividends, but those that do may be more reliable.
  2. If you're not focused on dividends but want cash returns, consider stock buybacks as a way to profit. Just remember that buybacks can be risky and are not guaranteed.
  3. For long-term growth investors, buybacks can be a sign of maturity in a company. Look for firms that might grow in value because of buybacks, but be cautious when such announcements come.

Buybacks and Stock Prices: Good or bad news?

Musings on Markets • 0 implied HN points • 25 Jan 11
💰 Finance Stock Markets Corporate Finance Investment strategy Valuation Methods Market Analysis Corporate Finance Stock Market Investment Strategies Financial Analysis Market Valuation
  1. Buybacks can increase stock prices if the market undervalues cash. If investors think the cash is wasted, buying back shares can make the stock more valuable.
  2. Companies with little debt that buy back shares can improve their value. However, if a firm is already in a strong position, a buyback might send negative signals about future growth.
  3. Mature companies often benefit more from buybacks because they might be seen as having poor returns on their investments. In contrast, fast-growing companies may harm their stock prices if they buy back shares.

Stock Buybacks: What is happening and why?

Musings on Markets • 0 implied HN points • 25 Jan 11
💰 Finance Investing Market Trends Stock Analysis Corporate Finance Economic Policy Investing Stock Market Corporate Finance Economics Business Trends
  1. Stock buybacks are becoming more popular than dividends among US companies. This shift has been happening for decades, with companies preferring to buy back their shares instead of paying out dividends.
  2. Several reasons explain this trend. One reason is that managers often prefer buybacks because their performance is tied to stock prices, which can drop when dividends are paid.
  3. Buybacks are more flexible for companies because they don't create ongoing expectations like dividends do. Companies that face uncertain earnings may choose buybacks to avoid the commitment of paying dividends in the future.
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How much cash is too much? Looking at Apple

Musings on Markets • 0 implied HN points • 19 Jan 11
💼 Business Finance Investing Corporate Economics Valuation Corporate Finance Investment strategy Market Analysis Risk management Company Valuation
  1. Cash balance should be compared to low-risk investments, not just operating costs. It's important to know how a company is using cash, since unnecessary risk can harm investors.
  2. Companies like Apple that effectively manage cash can be trusted to use it wisely. A good track record is key to determining how much cash is too much.
  3. Too much cash can lead to bad investment decisions, which could hurt company value. Keeping cash can be smarter than spending it poorly, especially if the company is performing well.

Herding behavior: Why, so what and what if?

Musings on Markets • 0 implied HN points • 15 Jan 11
💰 Finance Investment Strategies Market Trends Behavioral Finance Risk management Corporate Finance Investment Strategies Market behavior Hedge Funds Risk management Corporate Finance
  1. Herding behavior is when people follow the crowd, which we see in many areas of life, including finance. This can lead to investors buying or selling the same stocks at the same time.
  2. This behavior can cause problems like pricing bubbles and make markets more volatile. When many people act in the same way, it can lead to big changes in stock prices.
  3. Investors can make money by either joining the herd during trends or by going against it if they have a strong understanding and confidence in their choices. But it takes skill to do it successfully.

The Facebook Valuation!

Musings on Markets • 0 implied HN points • 05 Jan 11
💼 Business Investing Valuation Private Equity Market Analysis Financial Strategy Investment Valuation Private Equity Market Analysis Corporate Finance
  1. You can sometimes estimate a company's value from a single investment, but it's tricky since other benefits might affect the real value.
  2. Some companies, like Facebook, choose to stay private to avoid public scrutiny and to keep certain details secret, which can have its advantages.
  3. Valuing a private company like Facebook requires access to financial data and future projections, but many factors can make this complex and uncertain.

Corporate finance in illiquid markets

Musings on Markets • 0 implied HN points • 29 Dec 10
💰 Finance Corporate Finance Investment strategy Debt Management Market Liquidity Dividend Policy Corporate Finance Investment Market Liquidity Dividend Policy
  1. In illiquid markets, companies find it hard to access funds, which can limit their ability to take on new investments. Instead of focusing just on net present value, using a percentage return like IRR can help maximize their value.
  2. The mixture of debt and equity that minimizes costs can change in illiquid markets. If the equity market is less liquid, companies may want to increase debt, but if the debt market is illiquid, they might choose to decrease debt.
  3. Companies facing illiquidity may decide to keep more cash on hand instead of returning it to shareholders. This can lead to higher dividends and less reliance on stock buybacks, as investors favor cash during uncertain times.

Capital Structure: Optimal or Opportunisitic?

Musings on Markets • 0 implied HN points • 09 Sep 10
💼 Business Corporate Finance Investment Analysis Risk management
  1. Finding the right balance between debt and equity is crucial for businesses. This balance can help lower costs and improve management discipline.
  2. Companies often make financing decisions based on their perceptions of debt costs versus equity costs. This can lead to risky borrowing if firms get too confident.
  3. Setting a flexible range for optimal debt levels can help companies avoid taking on too much debt. This way, they can react to market conditions without overextending themselves.

Unstable risk premiums: A new paper

Musings on Markets • 0 implied HN points • 01 Sep 10
💰 Finance Investing Risk management Market Analysis Corporate Finance Financial Theory
  1. Risk premiums are less stable and more unpredictable now. This means that how much extra return investors expect can change a lot across different markets.
  2. Different markets, like bonds and real estate, are showing more similarities in risk premiums. This lets investors make better decisions by noticing when these premiums diverge.
  3. There are many ways to estimate risk premiums, and the paper offers a guide on when to use current numbers versus historical ones. This helps finance professionals make clearer choices.

What if nothing is risk free?

Musings on Markets • 0 implied HN points • 24 Jul 10
💰 Finance Investment Corporate Finance Risk management Market Analysis Economic Theory
  1. Risk-free investments are often assumed to exist, but government defaults challenge this idea. If governments can default, then no investment can really be guaranteed safe.
  2. The presence of a risk-free investment affects how people build their investment portfolios and manage companies. It allows investors to balance their risk without needing different types of assets.
  3. Without a risk-free investment, investors become more cautious and may charge more for risk. This can lead to lower prices for stocks and corporate bonds, affecting overall market stability.

Parent versus Consolidated financial statements

Musings on Markets • 0 implied HN points • 03 Jun 10
💰 Finance Accounting Investing Valuation Financial Statements Corporate Finance
  1. Parent company statements show only the parent’s results, while consolidated statements combine both the parent and its subsidiaries' financials. This can affect how investors view a company's worth.
  2. Consolidated statements leave out transactions between the parent and subsidiaries, giving a clearer picture of overall performance. This means some revenues might be excluded, which can look different from parent-only reports.
  3. When valuing a company, using parent company statements allows for flexibility across different businesses, while consolidated statements are helpful for understanding the whole group. The choice depends on how similar the parent and subsidiaries are.

Stock versus Flow: My thoughts

Musings on Markets • 0 implied HN points • 09 Apr 10
💰 Finance Investing Financial Analysis Corporate Finance Accounting Valuation Investing Accounting Corporate Finance Financial Analysis Valuation
  1. Balance sheets show a company's financial position at a specific time, but they can be misleading. Numbers like debt and cash can change significantly over time, making it hard to trust a single balance sheet.
  2. Flow statements, like the income and cash flow statements, show money coming in and going out over a period. These are generally more reliable for understanding a company's performance.
  3. To get a clearer picture of a company's financial health, look at quarterly balance sheets and current numbers instead of just year-end figures. This helps catch any manipulation or changes in financial status.

Goodwill: Plug Variable or Real Asset?

Musings on Markets • 0 implied HN points • 31 Mar 10
💰 Finance Accounting Valuation Investment Corporate Finance Financial Reporting
  1. Goodwill shows up on a company's balance sheet usually after an acquisition. It's the difference between what a company pays for another company and the book value of that company's assets.
  2. Goodwill is there to make the balance sheet balance, reflecting the difference between historical asset value and current market value, as well as the potential for future growth.
  3. When valuing a company, goodwill can complicate things. It can affect earnings and book value, but in reality, it shouldn’t change how you view the underlying assets or the company itself.

Time to Split!!

Musings on Markets • 0 implied HN points • 18 Jan 10
💰 Finance Investing Stock Market Corporate Finance Market Analysis Economics
  1. Companies can split their stocks, but not all do it regularly. Some companies, like Berkshire Hathaway, avoid stock splits to keep their high share prices.
  2. Many believe stock splits attract new investors and improve trading volume, but evidence shows this isn't always true. In reality, lower share prices often lead to higher transaction costs.
  3. Stock splits can create a small positive impact on prices, but they also increase volatility. Overall, they usually don't change a company's value, so they shouldn't be the main reason for investing.

Leveraged Buyouts

Musings on Markets • 0 implied HN points • 07 Oct 09
💰 Finance Investment Private Equity Market Analysis Corporate Finance Debt Management Private Equity Investments Financial Markets Corporate Finance Mergers & Acquisitions
  1. Leveraged buyouts involve using a mix of debt and equity to boost a company's value, which can also affect taxpayers.
  2. Control is important; poor management can be turned around by changing investment and dividend policies.
  3. Going private can help companies make tough decisions without worrying about short-term stockholder pressures.

Buybacks and Stock Prices..

Musings on Markets • 0 implied HN points • 20 Sep 09
💰 Finance Stock Market Corporate Finance Investment Strategies Financial Analysis Economic Trends
  1. Buybacks give companies a way to return cash to shareholders without the long-term commitment of dividends. They also help adjust financial leverage, especially if a company feels it has too little debt.
  2. When a company decides to buy back its stock, it's usually based on how the price compares to the company's perceived value. If they think the stock is worth more than its current price, they'll consider buying it back.
  3. Sometimes companies buy back stock just to follow what others in their industry are doing, which may not always be the best choice for their own financial health.

One year later: The lessons from the crisis

Musings on Markets • 0 implied HN points • 13 Sep 09
💰 Finance Market Analysis Corporate Finance Risk management Investment Banking Economic Policy Market Trends Investment Banking Risk management Financial Crises Corporate Finance
  1. Lehman's failure might have been necessary for Wall Street to recover. Allowing it to collapse helped the government take bigger steps to save other companies like AIG.
  2. Wall Street hasn't really changed after the crisis. They've gone back to risky practices and high bonuses, as if nothing happened.
  3. There’s a pattern of forgetting past mistakes on Wall Street. People there focus more on making deals than learning from what went wrong before.

Behavioral Corporate Finance 1: The Objective in Decision Making:

Musings on Markets • 0 implied HN points • 19 Jul 09
💼 Business Corporate Finance Decision-making Investor behavior Market Efficiency Finance Management Investing Corporate strategy Behavioral Economics
  1. Every business should have a clear goal for decision making. Traditionally, that goal is to make the company as valuable as possible, often by focusing on boosting stock prices.
  2. Behavioral finance points out that investors can act irrationally, which means stock prices might not always reflect a company's true value. Managers should be cautious about making decisions solely based on stock price reactions.
  3. It's essential for managers to aim for long-term value but also pay attention to market feedback. They can adjust their decisions to better connect with investors while still working towards the company's overall success.

Behavioral finance and corporate finance

Musings on Markets • 0 implied HN points • 12 Jul 09
💰 Finance Corporate Finance Behavioral Finance Investment strategy Market Analysis Behavioral Finance Corporate Finance Investment Theory Market behavior
  1. Behavioral finance studies how people's behavior affects financial decisions. It shows that both investors and managers can be overconfident, leading to poor decision-making.
  2. Even though traditional finance often ignores human behavior, combining insights from behavioral finance can improve corporate decision-making. It's important to understand why managers may deviate from financial principles.
  3. Recent developments in behavioral finance focus on improving systems and processes instead of just highlighting mistakes. This shift may help managers make better choices and minimize costs for shareholders.

Valuing declining and distressed companies

Musings on Markets • 0 implied HN points • 30 Jun 09
💼 Business Corporate Finance Valuation Methods Investment Strategies Market Analysis Risk management Investing Valuation Market Analysis Corporate Finance Risk Assessment
  1. Declining companies often show stagnant or even falling revenues over time. This can signal a deeper issue, especially if it's happening across their whole industry.
  2. These firms frequently deal with shrinking profits due to losing pricing power and competition. As a result, they might start selling off assets to stay afloat.
  3. Declining companies might pay out large dividends or buy back stock, but this can be risky. If they have a lot of debt, it could make their financial situation even worse.

The power of a brand name

Musings on Markets • 0 implied HN points • 02 Apr 09
💼 Business Branding Valuation Marketing Corporate Finance Consumer behavior Branding Valuation Marketing Corporate Finance
  1. A strong brand name can significantly increase the price of a product, even if the product itself is the same as a less popular one. Think of how much more you pay for Mickey Mouse merchandise compared to generic items.
  2. Companies with valuable brand names tend to have higher overall value than similar companies without strong brands. This value comes from their ability to attract customers and charge more.
  3. When valuing a business, the brand's worth should already be reflected in the financial data, such as profits and margins. Adding an extra value for the brand can lead to counting it twice, which isn't accurate.

Who uses preferred stock?

Musings on Markets • 0 implied HN points • 22 Mar 09
💰 Finance Investment Stocks Debt Equity Regulation Investment Stocks Debt Regulation Corporate Finance
  1. Financial service firms like preferred stock because it counts as equity for regulatory purposes. This helps them meet capital requirements even though it’s costly.
  2. Young and growth companies often prefer preferred stock because they are not making money. This way, they avoid the downsides of traditional debt and offer investors potential future benefits.
  3. The existence and use of preferred stock are significantly influenced by regulations and tax laws. Poor laws can lead companies to make unwise financing choices.

Preferred Stock: Fish or Fowl?

Musings on Markets • 0 implied HN points • 21 Mar 09
💰 Finance Investing Stocks Capital Economics Market Analysis Stock Market Capital Structure Dividend Policy Corporate Finance
  1. Preferred stock is tricky because it behaves differently in the U.S. compared to other countries. In the U.S., it mainly gives fixed dividends, while in places like Brazil, it acts more like common stock with variable dividends.
  2. When figuring out a company's cost of capital, preferred stock can be confusing. If it makes up less than 5% of the company's value, it's easier to ignore; if it's more, you need to treat it as a separate source of funding.
  3. Although preferred stock is like expensive debt without tax benefits, some companies still use it to raise money. The reasons for this will be discussed in more detail later.

My thoughts on the AIG fiasco

Musings on Markets • 0 implied HN points • 20 Mar 09
💰 Finance Banking Investments Economics Regulation Corporate Finance Investments Banking Economics Corporate Governance
  1. When companies get government bailouts, they should understand that things are different and people are watching. Paying huge bonuses when others are suffering just seems unfair.
  2. AIG had to pay money to banks like Goldman Sachs to avoid defaulting on obligations. This was likely what the bailout money was meant for.
  3. Some AIG employees were not responsible for the crisis, so keeping them happy with bonuses could help the company recover. It's important to keep good workers, even if it looks bad politically.

Dealing with Hybrids

Musings on Markets • 0 implied HN points • 19 Mar 09
💰 Finance Corporate Finance Investment Corporate Finance Valuation Investment Analysis Capital Structure Financial Instruments
  1. Hybrids are financial instruments that combine debt and equity, making them tricky to analyze. It’s best to break them down into their components to truly understand their value.
  2. Convertible debt is a common hybrid, where the lender can convert their loan into equity later. Treating it as just debt can mislead people into thinking it’s cheaper than it actually is.
  3. Preferred stock is a tougher hybrid to handle and needs special consideration. It often doesn't fit neatly into the debt or equity categories like other hybrids.

What is debt?

Musings on Markets • 0 implied HN points • 07 Mar 09
💰 Finance Debt Management Corporate Finance Investment Analysis Valuation Techniques Risk Assessment Debt Management Corporate Finance Valuation Investment Analysis Risk Assessment
  1. Debt involves fixed payments that must be made regardless of a company's financial situation. If a company doesn't make these payments, it risks losing control over its assets.
  2. Interest payments on traditional loans and bonds are usually clearly defined, making them straightforward to classify as debt. However, items like accounts payable are trickier because their costs are often included in broader categories without clear interest rates.
  3. Lease commitments are considered debt because they involve contractual obligations and can have legal consequences if unpaid. For many companies, lease payments represent a significant portion of their overall debt.

Fama-French and the Proxy Wars

Musings on Markets • 0 implied HN points • 21 Feb 09
💰 Finance Investing Risk management Market Analysis Financial Models Investing Market Trends Corporate Finance
  1. Fama and French found that traditional models like CAPM don't explain stock returns well, especially over long periods. They looked for other factors that might explain differences in returns better.
  2. They discovered that smaller companies and those with low price-to-book ratios tended to have higher returns. They saw these factors as signs of risk rather than market inefficiencies.
  3. In deciding between using CAPM or their proxy models, it often depends on your goal. For evaluating past performance, proxy models work well, but for future return predictions, sticking with CAPM is usually better.

What betas can... and cannot do...

Musings on Markets • 0 implied HN points • 08 Feb 09
💰 Finance Risk Assessment Investment Analysis Market behavior Economic Factors Market risk Investing Corporate Finance Economic Indicators Stock Analysis
  1. Betas are measures of relative risk, showing how exposed a stock is to market changes. A stock with a beta of 1.2 is more sensitive to market risks than an average stock.
  2. Betas can't explain overall market changes because they average out to one. If one stock's beta rises, others will fall, so they don’t explain all market movements.
  3. Betas also don’t capture risks unique to specific firms, like legal issues for tobacco companies or approval processes for biotech firms.

Bias in Valuation

Musings on Markets • 0 implied HN points • 28 Jan 09
💰 Finance Valuation Investing Economics Market Analysis Valuation Investments Market Analysis Risk Assessment Corporate Finance
  1. Bias can greatly affect valuations, often making them unreliable due to preconceived notions and financial incentives. It's important to be aware of who is paying for a valuation and how that might influence the numbers.
  2. To minimize bias, it's suggested that independent third parties handle valuations instead of the deal-makers. This could lead to more honest and accurate assessments.
  3. Trusting famous firms for valuations isn't always enough; it's crucial to investigate the potential biases in their assessments. Always ask who paid for the valuation and what biases might be present.

Data update for January 2009

Musings on Markets • 0 implied HN points • 20 Jan 09
💰 Finance Market Trends Risk Assessment Valuation Metrics Investment Strategies Corporate Finance Investing Market Analysis Risk management Corporate Finance Emerging Markets
  1. Equity risk premiums and default spreads dramatically increased in 2008, making companies worth about 40% less today than the year before, even if their earnings and ratings stay the same.
  2. During a crisis, emerging markets suffer the most, and risk premiums for these markets have also risen significantly, affected by higher premiums in developed markets.
  3. Although market multiples look cheap right now, the accounting numbers are outdated, meaning the full impact of the crisis isn’t reflected yet, and an update is expected in May 2009.

Corporate Finance - post crisis

Musings on Markets • 0 implied HN points • 19 Jan 09
💰 Finance Corporate Finance Investment Analysis Risk Assessment Debt Management Dividend Policy Corporate Finance Investment Analysis Risk management Capital Structure Dividend Policy
  1. Investment analysis will shift to more probabilistic methods rather than just relying on expected values. This means looking at a range of possible outcomes instead of one average guess.
  2. We can expect higher risk premiums for both stocks and bonds in the near future. This change is due to increasing uncertainty, especially in both developed and emerging markets.
  3. Companies will focus on having more cash and be cautious about paying dividends. They might prefer flexible options like stock buybacks instead of committing to regular dividends.

Sticky dividends!

Musings on Markets • 0 implied HN points • 27 Dec 08
💰 Finance Investing Dividends Market Trends Economic Policy Corporate Finance Dividends Market Trends Corporate Finance Investment Analysis Economic Policy
  1. Many companies stick to their dividend payments, even during tough times. This shows their commitment to returning value to shareholders.
  2. In recent months, some companies have started changing their dividend habits due to market challenges. Pfizer, for example, didn't increase its dividend for the first time in over four decades.
  3. The uncertainty in capital markets is making companies more cautious. They are now prioritizing having cash reserves to weather potential financial troubles.

To zero..and beyond...

Musings on Markets • 0 implied HN points • 18 Dec 08
💰 Finance Investing Banking Economics Monetary Policy Corporate Finance
  1. Nominal interest rates can potentially go negative, which is unusual and complicated. It makes people question why they'd invest in something that returns less money in the future.
  2. For smaller amounts of money, people would prefer safer options like checking accounts or cash at home rather than investing with negative returns.
  3. Large investors are showing distrust in banks by accepting negative interest rates rather than risking their cash in a bank, which highlights concerns about the banking system's stability.

Corporate Hedging: The Down Side

Musings on Markets • 0 implied HN points • 27 Nov 08
💰 Finance Risk management Corporate Finance Investment Strategies Market Analysis Derivatives Risk management Investment strategy Derivatives Corporate Finance Market Analysis
  1. Not all risks should be hedged. Some risks can be passed on to investors who may want that exposure, like how oil companies shouldn't hedge oil prices.
  2. Companies should hedge against important risks that can greatly affect their operations, like insurance for physical damage or stabilizing fuel costs for airlines.
  3. Firms can also benefit from seeking out risks where they have an advantage. This can lead to success if they understand and exploit those risks well.

GE's aborted buybacks...

Musings on Markets • 0 implied HN points • 26 Sep 08
💰 Finance Investing Market Trends Corporate Finance Stock Buybacks Economic Analysis
  1. Companies prefer buybacks over dividends because they can change buyback plans more easily in tough times. This helps them avoid bad market reactions.
  2. Investors should be cautious about companies that announce buyback programs; they might not actually go through with them.
  3. Stock buybacks are currently a major way companies return cash to shareholders, showing how they respond to market conditions and investor expectations.

Netflix's insane cash generation, and venture capital's new diet

Alex's Personal Blog • 0 implied HN points • 18 Oct 24
💼 Business Venture Capital Corporate Finance Market Trends Startup Ecosystem Earnings Reports
  1. Netflix is doing really well, growing its profits and revenue significantly, even after struggling last year. They're now expected to break $10 billion in revenue for the next quarter.
  2. Netflix has transformed into a cash-generating powerhouse, surprising critics who thought it was spending too much. It's a great example of how companies can turn their finances around.
  3. The venture capital scene is facing a slowdown with fewer big payouts and companies being sold. Many investors think there might be too much money chasing too few good startup opportunities.

Stimulus, Rent the Runway, and do people know how angry the average consumer is?

Alex's Personal Blog • 0 implied HN points • 09 Dec 24
💼 Business Economics Consumer behavior Market Trends Corporate Finance Investment
  1. China's economy is struggling with low inflation and falling producer prices, leading to the need for monetary stimulus to boost growth.
  2. Rent the Runway is facing significant market challenges, even as it takes steps to improve its business and reduce losses.
  3. There is a growing divide between business leaders and the general public regarding consumer anger, particularly about issues like health insurance.