Sense and Nonsense in Corporate Finance
Corporate finance has become the driving force in many business decisions in recent years, particularly during the LBO binge of the Eighties. Louis Lowenstein, finance professor at Columbia University, former corporate counsel, and past CEO of a retail chain, thinks that finance’s prominence is not only undeserved but also harmful to business operations and the financial markets. He seeks to reveal the “nonsense” in some current theories and practices and restore the “sense” of prudent management and long-term ownership.
This is not a comprehensive text; rather, Lowenstein focuses on important or troublesome issues in which there is a contribution to be made. One illuminating chapter looks at three department store chains—Federated, Macy, and May— demonstrating the effects of increasing debt. Lowenstein goes on to discuss capital structures, capital budgeting (including the overselling of the Capital Asset Pricing Model), leveraged buyouts (still an appropriate mechanism when used properly), and the importance of financial accounting.
Economics and finance theorists say that dividend policy shouldn’t matter, yet it stubbornly remains important to the financial markets. So two chapters are devoted to cash dividends, including suggestions to guide corporate policy, where dividends are now usually an afterthought. Other neglected topics: corporate share repurchases (often the best long-term use of excess funds) and stock splits and stock dividends (both irrelevant and wasteful, yet widespread). A final chapter discusses the proper relationship between shareholders and management, pulling together and underscoring points made throughout the book.
SENSE AND NONSENSE is well-titled. Lowenstein never loses sight of the real world—as he says in the introduction, “finance is complex, but the basic rules are not”—so the discussion is pragmatic and readable as well as knowledgeable. He has little patience for mathematical models which pretend to unrealistic precision, preferring to face the messiness and uncertainty of the actual business environment, as all managers must. This concise dose of common sense would be worthwhile reading for finance students and practitioners alike.