Morris G. Danielson

Shareholder Theory - How Opponents and Proponents Both Get it Wrong

Shareholder wealth maximization is accepted by most financial economists as the appropriate objective for financial decision-making. Recently, wealth maximization has been criticized by a growing array of opponents for condoning the exploitation of employees, customers, and other stakeholders, and encouraging short-term managerial thinking. Although these critics are misguided, proponents of shareholder theory have helped to create this confusion by exhorting managers to maximize the firms current stock price. Because a firms stock price can be manipulated in the short-term, incentives to increase a firms current stock price can distort operating and investment decisions. When wealth maximization is properly defined as a long-term goal, it is not as narrowly focused as critics believe. The main prescription of shareholder theory-invest in all positive net present value projects-benefits not only shareholders, but also key stakeholders including employees and customers.

The Return-Stages Valuation Model and the Expectations within a Firm's P/B and P/E Ratios

The return-stages model can quantify the expectations facing a firm from its price-to-book (P/B) and price-to-earnings (P/E) ratios. We illustrate two implications of the model. First, a firm’s P/B and P/E ratios can predict the future cash flow pattern earned by a firm. Second, the operating performance consistent with a given stock return differs across four groups of firms: Growth Firms, Mature Firms, Turnaround Firms, and Declining Firms. Our results imply that a firm’s stock return depends, in part, on how its operating performance compares to the expectations defined by its P/B and P/E ratios.

A Note on Agency Conflicts and the Small Firm Investment Decision

This paper explains how agency conflicts—and potential agency conflicts—can influence the investment decisions of small firms, and provides evidence of these effects using data from a recent survey of small firm investment practices. The survey asks business owners to identify their most important investment concern—overinvestment or underinvestment. We find that underinvestment concerns are more prevalent in growing firms, and those with concentrated ownership and control structures. Overinvestment concerns increase as firms adopt less‐concentrated ownership and control structures. These results suggest that the management challenges facing small firms shift as the degree of separation between ownership and control becomes greater.

RANKING MUTUALLY EXCLUSIVE PROJECTS: THE ROLE OF DURATION

This paper develops a new measure of cash-flow timing called “return duration.” Numerically quite close to Macaulay duration, return duration is a straightforward function of a projects net present value (NPV) and internal rate of return (IRR). When comparing mutually exclusive projects, differences in return duration can explain ranking conflicts between NPV and IRR. The paper also clarifies the conditions under which a manager should consider duration or generalized NPV before making investment decisions when faced with such ranking conflicts.

The IRR of a Project with Many Potential Outcomes

ABSTRACT This article shows that the internal rate of return (IRR) of a projects expected cash flow stream is a weighted average of the IRRs offered by the projects (many) possible future outcomes, where the weights are calculated using the outcome probabilities and invested capital balances. Because the invested capital associated with a particular realization is a function of the Macaulay duration of the cash flows in that outcome, the weights depend on the outcome probabilities and the effective length of each cash flow stream.

An analysis of the research productivity of authors appearing in financial education journals

Purpose - This paper seeks to evaluate the research records of scholars contributing articles to the two premier financial education journals – Design/methodology/approach - The names of all authors appearing in the Findings - The majority of the authors appearing in the two education journals have also penned one or more high-impact article, with an average of over three high-impact appearances. Research limitations/implications - The identification of a unique set of the 23 “best” journals in any academic field is an inherently subjective task. The exclusion of additional high-quality journals from this list (especially those from the related fields of accounting and economics) might short change the research records of some education authors. Originality/value - Evidence about the average quality of articles appearing in education journals could be useful to university administrators when evaluating faculty research records for purposes of tenure, promotion, and merit awards.

Double vision: Insights about the origin and interpretation of multiple IRRs

ABSTRACT The ability of a projects internal rate of return (IRR) to quantify its economic return has been questioned by many scholars over the past 60 years, most recently by Magni (2010, 2013). Although IRR is a plausible—albeit imperfect—measure of a projects economic return when the cash flow stream is conventional, IRR can be an untenable measure of an unconventional projects economic return. The goal of this article is to identify a simple, intuitive explanation of IRR, one that can be applied to any cash flow pattern. To do this, the article shows how a projects IRR systematically changes when it first crosses from the conventional into the unconventional realm (i.e., a small cash outflow is appended to a conventional cash flow stream) and then as it becomes progressively more unconventional. This process reveals that the most robust economic interpretation of IRR—for both conventional and unconventional projects—is that a projects IRRs are external benchmarks that divide the set of all plausible discount rates into positive and negative net present value (NPV) ranges, rather than internally generated returns. Because it can be difficult to estimate a projects cost of capital with precision, this information can help guide the sensitivity analysis of a project.

A research portfolio approach to evaluating finance journal quality

Purpose - – The purpose of this paper is to update and extend Danielson and Heck (2014) to provide additional evidence about the relative quality of a set of 23 high-impact finance journals. In particular, the paper summarizes the research records of all scholars contributing articles to each of the 23 journals from 1970 to 2014, and uses this information to identify journals that publish articles by similar sets of authors, and rank the 23 journals based upon publication activity from 2010 to 2014. Design/methodology/approach - – The names of all authors appearing in each of the 23 journals during the 1970 to 2014 period – and the number of appearances by each author – were summarized directly from the journals’ table of contents. From this data, the lifetime (1970-2014) research portfolio of each journal’s average author was quantified for two sub-periods: 1970-2009 and 2010-2014. Using the assumption that a journal’s quality is positively related to its ability to attract submissions from accomplished researchers, this data provides information about the authors’ subjective ranking of finance journals and about how these rankings have changed during the past five years. Findings - – The finance literature experienced rapid growth during 2010-2014, with almost 25 percent of all appearances from 1970 to 2014 occurring in the last five years of the period. Based upon publication activity during 2010-2014, the Research limitations/implications - – The identification of a unique set of the 23 “best” journals in any academic field is an inherently subjective task. Adding journals to (or removing journals from) this population could cause the ranking of some individual journals to shift. Originality/value - – Evidence about the average quality of articles appearing in the leading finance journals is useful when evaluating faculty research records for purposes of tenure, promotion, and merit awards.