Knowledge that Transforms

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Over the past fifteen years we have seen an enormous increase in the theoretical and empirical literature in the field of finance. This outpouring of academic research has had a substantial impact on the content of finance courses including the introductory course. However, the changes in content at the introductory level appear to me to have been evolutionary rather than revolutionary. Textbooks contain more analytical and theoretical material, but this material is provided within traditional structures. The contents of the chapters have changed but not the titles of chapters nor the sequencing. With minor changes in wording I would guess that course outlines of today appear little different from those of ten years ago. I am not particularly disturbed by these observations, but I believe it is time to take a close look at what we are doing to our students, and I would like to explore the possibilities of a more coherent approach to the introductory course.

At the beginning perhaps it would be appropriate to say that three assumptions have been made throughout the entire discussion. They include:1. An assumption that there are approximately 45 classroom hours available to the instructor, 2. An assumption that for many students it is the only finance course they will take, 3. An assumption that the course is oriented toward business finance, and not, for instance, capital markets, or money and banking.

Richard C. Aspinwall, Discussion: Implications of Recent Banking Developments for Financial Stability, The Journal of Financial and Quantitative Analysis, Vol. 10, No. 4, 1975 Proceedings (Nov., 1975), pp. 611-613

My comment was requested by the Chairman to be directed especially toward Dr. Robert Holland's excellent and thoughtful account of the changes, past and prospective, springing from the development of bank holding companies in American banking markets.

It has been suggested by many [1, 2, 5, 6, 7, 10 and more] and denied by few that, ceteris paribus, a well-informed risk-averse investor should prefer investments which have positively skewed distributions of rates of return. Passing over the models which underlie such assertions, the question is addressed empirically here. Do (as opposed to “should”) investors prefer investments that are positively skewed, ceteris paribus?

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In a recent issue of this journal, Linke and Kim [1], hereafter denoted as L-K, have shown that for finite-time horizons in excess of one period and if, over the same period, the firm's ratio of debt to equity is held constant, the firm's overall required rate of return could be expressed as a weighted average cost of capital. In their proofs L-K distinguish between firms engaging in no financing over the relevant horizon (the nonfinancing case), and those in which such financing is permitted to take place. In the latter case, their procedure is to derive proofs for new debt and equity financing cases separately. In all cases their proofs are correct. However, we wish to draw attention to an implied restriction which must hold in order for their proofs in the financing cases to be valid. Our objective is to set forth a proof which allows both new debt and equity financing simultaneously, and most importantly, which is also free of the implied restriction.