The third edition of this widely used collection provides a thoroughly revised set of seminal articles presenting the latest in academic thinking by experts in the field of finance. Using articles from the highly regarded Journal of Applied Corporate Finance, it gives real insight into the practical implications of the most recent theoretical advances in the field. The completely revised and updated third edition retains a number of the key original articles and adds new pieces on the most important recent developments, including corporate governance, corporate restructuring, risk management, dividend policy, capital structure, and the economic consequences of high leverage and stock market pressures on corporate management and the role of corporate boards in the 1990s.

Joel M. Stern is Managing Partner of Stern Stewart & Co., a New York corporate financial advisory firm. He is author of Analytical Methods in Financial Planning and Measuring Corporate Performance, and currently serves as Adjunct Professor of Finance at Columbia University’s Graduate School of Business.

Donald H. Chew was a founding partner of Stern Stewart & Co., and is Editor-in-Chief of the Bank of America Journal of Applied Corporate Finance. He holds a Ph.D. in English and American Literature, as well as an M.B.A. in Finance, from the University of Rochester.

Preface to the Fourth Edition

ix

Preface to the First Edition

xiii

Part I: Financial Markets

1

(50)

The History of Finance: An Eyewitness Account

3

(7)

Merton H. Miller

The Theory of Stock Market Efficiency: Accomplishments and Limitations

10

(15)

Ray Ball

Market Myths

25

(19)

G. Bennett Stewart, III

An Analysis of Trading Profits: How Trading Rooms Really Make Money

44

(7)

Alberic Braas

Charles N. Bralver

Part II: The Corporate Investment Decision

51

(74)

Finance Theory and Financial Strategy

54

(9)

Stewart C. Myers

In Defense of Beta

63

(7)

S. P. Kothari

Jay Shanken

The Liquidity Route to a Lower Cost of Capital

70

(19)

Yakov Amihud

Haim Mendelson

The Promise of Real Options

89

(17)

Aswath Damodaran

Real Options: State of the Practice

106

(19)

Alex Triantis

Adam Borison

Part III: The Financing Decision I: Capital Structure

125

(114)

The Modigliani--Miller Propositions After Thirty Years

129

(13)

Merton H. Miller

Still Searching for Optimal Capital Structure

142

(11)

Stewart C. Myers

The Capital Structure Puzzle: Another Look at the Evidence

153

(14)

Michael J. Barclay

Clifford W. Smith, Jr.

What Do We Know About Stock Repurchases?

167

(23)

Gustavo Grullon

David L. Ikenberry

The Dividend Cut: ``Heard 'Round the World'': The Case of FPL

190

(13)

Dennis Soter

Eugene Brigham

Paul Evanson

Stern Stewart Roundtable on Capital Structure and Stock Repurchase

203

(36)

Clifford Smith

Tim Opler

Rich Thevent

Dennis Soter

David Ikenberry

Erik Sirri

Donald Chew

Part IV: The Financing Decision II: The Finance Vehicles

239

(94)

Raising Capital: Theory and Evidence

242

(18)

Clifford W. Smith, Jr.

Financing Corporate Growth

260

(18)

Bradford Cornell

Alan C. Shapiro

Are Banks Still Special? New Evidence on Their Role in the Corporate Capital-Raising Process

278

(13)

Christopher James

David C. Smith

Convertible Bonds: Matching Financial and Real Options

291

(15)

David Mayers

The Uses of Hybrid Debt in Managing Corporate Risk

306

(12)

Charles W. Smithson

Donald H. Chew, Jr.

Using Project Finance to Fund Infrastructure Investments

318

(15)

Richard A. Brealey

Ian A. Cooper

Michel A. Habib

Part V: Risk Management

333

(98)

Financial Innovation: Achievements and Prospects

337

(8)

Merton H. Miller

Managing Financial Risk

345

(22)

Clifford W. Smith, Jr.

Charles W. Smithson

D. Sykes Wilford

Rethinking Risk Management

367

(18)

Rene M. Stulz

Theory of Risk Capital in Financial Firms

385

(18)

Robert C. Merton

Andre F. Perold

Corporate Insurance Strategy: The Case of British Petroleum

403

(13)

Neil A. Doherty

Clifford W. Smith, Jr.

Value at Risk: Uses and Abuses

416

(15)

Christopher L. Culp

Merton H. Miller

Andrea M. P. Neves

Part VI: International Finance

431

(84)

Financial Markets and Economic Growth

434

(8)

Merton H. Miller

Globalization, Corporate Finance, and the Cost of Capital

442

(19)

Rene Stulz

Globalization of Capital Markets and the Asian Financial Crisis

461

(11)

E. Han Kim

Incorporating Country Risk in the Valuation of Offshore Projects

472

(13)

Donald R. Lessard

Yankee Bonds and Cross-Border Private Placements: An Update

485

(13)

Greg Johnson

Financial Risk Management for Developing Countries: A Policy Overview

498

(17)

Donald R. Lessard

Part VII: International Corporate Governance

515

(74)

Is American Corporate Governance Fatally Flawed?

518

(8)

Merton H. Miller

The Role of Corporate Governance in South Korean Economic Reform

526

(9)

Kenneth Scott

Corporate Ownership and Control in the U.K., Germany, and France

535

(17)

Julian Franks

Colin Mayer

Universal Banks Are Not the Answer to America's Corporate Governance ``Problem'': A Look at Germany, Japan, and the U.S.

552

(18)

Jonathan R. Macey

Geoffrey P. Miller

Which Capitalism? Lessons from the East Asian Crisis

570

(9)

Raghuram G. Rajan

Luigi Zingales

Measuring the Effectiveness of Different Corporate Governance Systems: Toward a More Scientific Approach

579

(10)

Jonathan R. Macey

Epilogue

589

(14)

Merton Miller's Contribution to Modern Finance

590

(13)

Rene M. Stulz

Index

603

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