Harald Hau's Quotes of the Day from Corporate Finance
Many quotes to review today! Harald was in fine form, and the class was hungry for humor, having just emerged from three hours of Organizational Behavior.
[At the very beginning of class] "This morning the prime minister of Ireland was asked if Ireland was part of the coalition of the willing. He said, 'We are not a part of the coalition. But we are willing.'"
[During the introduction to the MRC case discussion, about the acquisition of an rayon manufacturer in 1969] "So why are we doing this case about MRC? Compared with Ameritrade, this is the old economy. Old in the sense of capital-intensive, but also old in the sense of dying. It's a dying industry."
[This isn't particularly funny but does display impressive vocabulary] "The problem is with this ceteris paribus condition which is not really true..."
[When noticing that we had only 20 minutes left in class and there was still a lot of material to cover] "Any questions? Or rather, any urgent questions? OK, new convention: for urgent questions, raise both hands."
[When discussing management entrenchment and the various techniques (e.g. golden parachutes) used to ease them out and unlock shareholder value with new management] "... this only works with companies... perhaps it would be cheaper to buy Iraq and change its management..."
Today's class was really interesting. The topics that we covered were quite cool. It turns out that even if your company shows accounting profits in perpetuity, it can still destroy value (for you finance types, value destruction happens when ROIC < WACC). It's often better to shut down a firm if it is not creating value, but this is very difficult. Because of...
... Management entrenchment, the second cool topic. Managers (and especially owner/managers, i.e. founders) are resistant to leaving a company even when it is in the shareholder's best interest (yet another aspect of agency theory). This is why golden parachutes are so common. One enterprising researcher did come up with a way to test the value of this effect: he took a set of CEOs who had died in plane crashes, and measured the stock price behaviour in the days just before and just after the event. In cases when the CEO was the founder, the share price rose 3% on average! In cases when the CEO was not the founder, there was no noticeable effect. This is a great example of how finance can quantify and illuminate causes and effects of organizational structure and behavior.
3:32:19 PM 
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