Economics Explored

How LBOs, Share Buybacks & Private Equity Revolutionized Corporate America: Don Chew’s Case for Transformation - EP270

Episode Summary

Donald Chew discusses the evolution of corporate finance, emphasizing the shift from old-fashioned corporate finance, which focused on steady earnings growth, to modern corporate finance, which aims for high returns on capital. He highlights the decline of conglomerates in the 1970s and the rise of private equity. Despite criticism, Chew argues that modern corporate finance has been a success story, citing the doubling of U.S. public company market capitalization in the 1980s and the significant correlation of R&D and selling, general and administrative expenses (SG&A) expenses with corporate value. He also addresses the financial crisis, arguing it was due to mispriced mortgages and government policies, not market inefficiencies. Donald Chew is the founding editor of the Journal of Applied Corporate Finance, and joins show host Gene Tunny to discuss his latest book, The Making of Modern Corporate Finance, published by Columbia University Press.

Episode Notes

Donald Chew discusses the evolution of corporate finance, emphasizing the shift from old-fashioned corporate finance, which focused on steady earnings growth, to modern corporate finance, which aims for high returns on capital. He highlights the decline of conglomerates in the 1970s and the rise of private equity. Despite criticism, Chew argues that modern corporate finance has been a success story, citing the doubling of U.S. public company market capitalization in the 1980s and the significant correlation of R&D and selling, general and administrative expenses (SG&A) expenses with corporate value. He also addresses the financial crisis, arguing it was due to mispriced mortgages and government policies, not market inefficiencies.  Donald Chew is the founding editor of the Journal of Applied Corporate Finance, and joins show host Gene Tunny to discuss his latest book, The Making of Modern Corporate Finance, published by Columbia University Press.

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About this episode’s guest: Donald Chew

Don Chew is the founding editor and Editor-in-Chief of the Journal of Applied Corporate Finance (JACF), a publication he started almost 30 years ago. He has published over ten books on corporate finance, including The New Corporate Finance: Where Theory Meets Practice and The Revolution in Corporate Finance (with Joel Stern), which are both widely used in business schools throughout the United States and Europe. Don has both a Ph.D. in English and an MBA in finance from the University of Rochester.

Timestamps for EP270

• Introduction (0:00)
• The Decline of Conglomerates and the Rise of Modern Corporate Finance (5:58)
• The Role of Private Equity and Corporate Governance (14:25)
• The Impact of Modern Corporate Finance on Corporate Value (15:03)
• The Future of Corporate Finance and Productivity Measurement (16:37)
• The Role of Corporate Finance in Economic Growth (19:27)
• The Critique of Modern Corporate Finance and Corporate Social Responsibility (27:26)
• The Financial Crisis and the Role of Government Policy (35:40)
• The Future of Corporate Finance and the Role of Private Equity (43:21)

Takeaways

1. Modern Corporate Finance Principles: The shift from prioritizing steady earnings growth to maximizing long-term firm value has reshaped corporate strategies globally.
2. The Importance of R&D: Increases in R&D and SG&A spending are now critical indicators of corporate value and long-term success, according to Don Chew.
3. Private Equity’s Role: Private equity has transformed underperforming companies, streamlining operations and reallocating capital for growth.
4. The Evolution of Corporate Governance: Shareholder activism has replaced hostile takeovers as the primary tool for enforcing corporate accountability.
5. ESG and Value Creation: Enlightened value maximization is the idea that corporations can address societal concerns while enhancing long-term profitability.

Links relevant to the conversation

Don Chew’s new book The Making of Modern Corporate Finance:

https://www.amazon.com.au/Making-Modern-Corporate-Finance-History/dp/0231211104

Econometric study of benefits to consumers of Wal-Mart:

https://onlinelibrary.wiley.com/doi/abs/10.1002/jae.994

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Full transcripts are available a few days after the episode is first published at www.economicsexplored.com.