Book review: The Making of Modern Corporate Finance

DONALD Chew’s forthcoming book, The Making of Modern Corporate Finance, is a love letter to those who published in the Journal of Applied Corporate Finance, of which the author is the founder and remains its publishing editor. It is a love letter to unfettered capitalism and the financial system that oils the gears of commerce. The book will be of interest to a broad readership but should be required reading for investment professionals, who may have – while keeping up with the day-to-day developments in finance – missed the broader perspective on the financial innovations that underpin today’s global system.

The subtitle, “A History of the Ideas and How They Help Build the Wealth of Nations”, aptly describes the book’s narrative arc as it works chronologically through four “core subjects”:

• The corporate investment decision
• The corporate financing decision
• Enterprise risk management  
• Corporate governance and investor communication

After a chapter case study on Japan that effectively links corporate finance and social wealth, the history begins with Franco Modigliani and Merton Miller’s late 1950s and early 1960s work on “capital structure and dividend irrelevance”. Rather than capital structure, investors should focus on earnings power – investment in projects that earn at least their cost of capital – and how corporate risks are managed. If capital structure is a red herring, so too is the focus on near-term earnings per share (EPS). Chew offers as a good example: investors who focused on quarterly EPS figures rather than future earnings power at Amazon.