Book Review: History of Corporate Finance

With a title of a book like History of Corporate Finance, the expectations are running high even before one starts reading. It is written by Jonathan Barron Baskin and Paul J. Miranti Jr. It was started by Baskin but due to his untimely death was completed by Miranti Jr. 

The book was released in 1997 and could easily have been a finance classic but somehow does not hold the reader’s attention. The essays do not connect seamlessly and one does not get a complete picture. It ends up being a mesh up of history of firm, money, governance and so on.

Having said that, it is still a compelling read and tells you a lot about how different financing mechanisms emerged – debt, debetures, common stock, preference stock and so on. Then one also understands how for finance to work one has to look beyond finance. Things like law, information flow etc are as critical. The initial essays especially point to the role of information asymmetry. There was hardly any information on the firm wanting to raise finance. This was problematic in large scale and risky projects like railways and canals. How information asymmetry was curbed by various entities and government guarantee is quite a read.

Above all, it tells you how finance and its various arrangements are as old and historic as it can get. All this talk of financial engineering. modern finance, finance/banking revolutions are just bunkum really compared to what was achieved back then. The way these ideas were shaped and difficulty with which they were sold to public was the real revolution.

This study focuses on the role of institutions and organizations in the development of corporate finance from the Italian merchant banks of the Renaissance through the formation of conglomerates and leveraged-buy-out partnerships in contemporary Wall Street. It also puts forth a compelling argument for the closer integration of historical and quantitative research methodologies in financial theory. The epilogue contains an original algorithm that explains the relationship between the short-term, firm-specific factors and longer-term environmental elements that have shaped the historical development of finance.

Actually, the chapters dealing with history till say 1950 are still fine. It is chapters which deal with post 1950 history are where there are gaps. It reads more like a a business history with focus on few American firms to make the broad points. But then you realise that much of the stuff was actually done in the past. Most of corporate finance literature emerged post 1950 but practices of corporate finance existed much before. Much of developments in finance are due to changes in technology and not the core principles of finance.

The Nobel Prizes in finance (posthumously of course) should go to the original founders who struggled with things like information asymmetry, contacting, monitoring and so on. Later scholars just added their models to it and have just added to the confusion. Infact, the founders themselves will not be able to understand much of the corporate finance  unless translated in their language. And once it is translated, they are sure to ask why are you being awarded for something I/we figured out/discovered?

 

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