Top

Published in:

2022 | OriginalPaper | Chapter

2. Finance: A Value Paradigm and Equations Without Space

Author : Armen V. Papazian

Published in: The Space Value of Money

Publisher: Palgrave Macmillan UK

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Excerpt

How ridiculous are the boundaries of mortals!

Lucius Annaeus Seneca, Naturales Quaestiones, 65AD

…

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

previous chapter Introduction

next chapter Sustainable Finance: Frameworks Without Value Equations

The philosophical roots of this focus can potentially be traced back to moral philosophy and the utilitarianism of Jeremy Bentham and John Stuart Mill. Although with much reductionism and simplification, Adam Smith’s invisible hand and the assumptions of classical economics along with Alfred Marshall’s introduction of the utility function into economics have contributed to this focus. Friedman’s doctrine (Friedman 1970) has provided the business rationale of shareholder value maximisation which is a key aspect of this focus.

Note that the shareholder value maximisation rationale has also been critiqued extensively in the literature (See Stout, 2012, for a discussion of the theory, history, and critique of ‘shareholder value maximisation’).

I would like to state clearly that there are many forward-looking risk-taking and legacy defining investors who invest to build and improve human society and the future of our children. The discussion here is about the value framework in finance theory and practice, and not a blanket qualification of actual investors.

The NPV equation is sometimes written in the below formats, where the first cash flow CF₀ (II) is included in the right-side term as the first cash flow at t = 0, or excluded but without the negative sign as the negative sign of the first cash flow CF₀ is assumed:

\(\begin{array}{*{20}c} {NPV = \sum_{t = 0}^T {\frac{CF_t }{{\left( {1 + r} \right)^t }}} } & {NPV = CF_0 + \sum_{t = 1}^T {\frac{CF_t }{{\left( {1 + r} \right)^t }}} } \\ \end{array}\)

A look at ‘Value Investing’ built around earnings and fundamental value strategies discussed by Graham and Dodd (1934) in Security Analysis, and by Graham (1949) in The Intelligent Investor, reveals a similar abstraction from impact.

The authors have addressed the recent trend in sustainable finance by integrating ESG Factors in their 7th edition of the same book (2020). More on ESG factors in the next chapter.

My own doctoral research (Papazian, 2004) utilised this RPR methodology to identify stock market winners and losers on the London Stock Exchange using the stocks included in the FT500 index between 1988 and 1992. I subsequently applied clinical methodology (Jensen et al., 1989) to explore and scrutinise the firms included in the portfolios in real time and space between 1988 and 1996.

Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilties. The Journal of Political Economy, 81, 637–654. https://www.jstor.org/stable/1831029. Accessed 02 February 2021.

Brealey, A. R., Myers, C. S., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw Hill.

Caldecott, B. (2019). Viewpoint: Spatial finance has a key. IPE Magazine, https://www.ipe.com/viewpointspatial-finance-has-a-key-role-/10034269.article Accessed 02 February 2022.

Carney, M. (2015). Breaking the tragedy of the horizon—Climate change and financial stability. Bank of International Settlements FSB. Available at https://www.bis.org/review/r151009a.pdf. Accessed 26 December 2020.

CGFI-SFI. (2021). State and trends in spatial finance. Centre for Green Finance and Investment - Spatial Finance Initiative. https://www.cgfi.ac.uk/wp-content/uploads/2021/07/SpatialFinance_Report.pdf. Accessed 02 February 2022.

Choudhry, M. (2012). The principles of banking. Wiley.CrossRef

Choudhry, M. (2018). Past, present, and future principles of banking and finance. Wiley.

Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1–44. https://www.jstor.org/stable/724810. Accessed 02 February 2021.

Credit Suisse. (2010). Technical analysis—Explained. https://www.credit-suisse.com/pwp/pb/pb_research/technical_tutorial_de.pdf. Accessed 02 February 2022.

Damodaran, A. (2012). Investment valuation (3rd ed.). Wiley.

Damodaran, A. (2017). Damodaran on valuation (2nd ed.). Wiley.

De Bondt, W. F. M., & Thaler, R. (1985). Does the stock market overreact? The Journal of Finance, 40(3), 893–805. https://doi.org/10.2307/2327804. Accessed 02 February 2021.

Dissanaike, G. (1994). On the computation of returns in tests of the stock market overreaction hypothesis. Journal of Banking & Finance, 18(6), 1083–1094. https://doi.org/10.1016/0378-4266(94)00061-1. Accessed 02 February 2022.

Dissanaike, G. (1997). Do stock market investors overreact? Journal of Business Finance and Accounting, 24(1), 27–50. https://doi.org/10.1111/1468-5957.00093. Accessed 02 February 2021.

Dissanaike, G., & Papazian, A. V. (2005). Management turnover in stock market winners and losers: A clinical investigation. European Corporate Governance Institute. ECGI. Finance Working Paper N° 61/2004. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=628382. Accessed 02 February 2021.

Edwards, R. D., & Magee, J. (1948). Technical analysis of stock trends. Stock Trend Service.

EIA. (1995). Electricity generation and environmental externalities: Case studies. Energy Information Administration. https://www.nrc.gov/docs/ML1402/ML14029A023.pdf. Accessed 02 February 2022.

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25, 383–417. https://doi.org/10.2307/2325486. Accessed 02 February 2021.

Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47, 427–465. https://doi.org/10.2307/2329112. Accessed 02 February 2021.

Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. The Journal of Finance, 51, 55–84. https://doi.org/10.1111/j.1540-6261.1996.tb05202.x. Accessed 02 February 2021.

Fama, E. F., & French, K. R. (2004). The capital asset pricing model: Theory and evidence. Journal of Economic Perspectives, 18, 25–46. https://www.aeaweb.org/articles?id=10.1257/0895330042162430. Accessed 02 February 2021.

Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116, 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010. Accessed 02 February 2021.

Fibonacci, Leonardo of Pisa (1202) Liber Abaci. Translated by Sigler, LE 2002, Fibonacci’s Liber Abaci, Springer.

Friedman, M. (1970). A Friedman doctrine—The social responsibility of business is to increase its profits. The New York Times. https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html. Accessed 02 February 2022.

Gaarder Haug, E. (2004). Space-time finance: The relativity theory’s implications for mathematical finance. Wilmott Magazine. July 2004: 2–15.

Goetzmann, W. N. (2004). Fibonacci and the financial revolution. National Bureau of Economic Research. Working Paper 10352. http://www.nber.org/papers/w10352. Accessed 02 February 2022.

Gordon, J. R., & Gordon, M. J. (1997). The finite horizon expected return model. Financial Analysts Journal, 53, 52–61. https://doi.org/10.2469/faj.v53.n3.2084. Accessed 02 February 2021.

Gordon, M. J., & Shapiro, E. (1956). Capital equipment analysis: The required rate of profit. Management Science, 3, 102–110. https://www.jstor.org/stable/2627177. Accessed 02 February 2021.

Gordon, M. J. (1959). Dividends, earnings, and stock prices. The Review of Economics and Statistics, 41, 99–105. https://doi.org/10.2307/1927792. Accessed 02 February 2021.

Graham, B., & Dodd, D. (1934). Security analysis. McGraw Hill.

Graham, B. (1949). The intelligent investor. Harper & Brothers.

Graham, J., & Harvey, C. (2002). How CFOs make capital budgeting and capital structure decisions. Journal of Applied Corporate Finance, 15, 8–23. https://doi.org/10.1111/j.1745-6622.2002.tb00337.x. Accessed 02 February 2021.

Harvey, R., Liu, Y., & Zhu, H. (2016). ... and the cross-section of expected returns. The Review of Financial Studies, 29, 5–68. https://doi.org/10.1093/rfs/hhv059. Accessed 02 February 2021.

Haynes, J. (1895). Risk as an economic factor. The Quarterly Journal of Economics, 9(4), 409–449. https://doi.org/10.2307/1886012. Accessed 02 February 2022.

IPCC. (2018). Summary for policymakers. In Global warming of 1.5 ℃. IPCC. Available at https://www.ipcc.ch/site/assets/uploads/sites/2/2018/07/SR15_SPM_High_Res.pdf. Accessed 12 December 2020.

IPCC. (2021). Climate change 2021: The physical science basis. https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM_final.pdf. Accessed 02 February 2022.

IPCC. (2022). Climate change 2022: Impacts, adaptation and vulnerability. Summary for Policymakers. Intergovernmental Panel on Climate Change. https://report.ipcc.ch/ar6wg2/pdf/IPCC_AR6_WGII_SummaryForPolicymakers.pdf. Accessed 28 February 2022.

Isaac, D., & O’Leary, J. (2013). Property valuation techniques (3rd ed.). Palgrave Macmillan.CrossRef

Jensen, M. C., Fama, E., Long, J., Ruback, R., Schwert, G. W., & Warner, J. B. (1989). Editorial: Clinical papers and their role in the development of financial economics. Journal of Financial Economics, 24, 3–6. https://www.sciencedirect.com/science/article/abs/pii/0304405X8990069X?via%3Dihub. Accessed 02 February 2021.

Knight, F. H. (1921). Risk, uncertainty and profit. Houghton Mifflin Company.

Koller, T., Dobbs, R., Huyett, B., & McKinsey and Company. (2011). Value: The four cornerstones of corporate finance (6th ed.). Wiley.

Koller, T., Goedhart, M., Wessels, D., & McKinsey and Company. (2015). Valuation: Measuring and managing the value of companies (6th ed.). Wiley.

Krugman, P. (1978). The theory of interstellar trade. Economic Enquiry, 48, 1119–1123.CrossRef

Kuhn, T. (1962). The structure of scientific revolutions. University of Chicago Press.

Lakonishok & Shapiro. (1986). Systematic risk, total risk and size as determinants of stock market returns. Journal of Banking & Finance, 10, 115–132. https://doi.org/10.1016/0378-4266(86)90023-3. Accessed 02 February 2022.

Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics, 47, 13–37. https://doi.org/10.2307/1924119. Accessed 02 February 2021.

Malkiel, B. G. (1973). A random walk down wall street. W. W. Norton & Company.

Malkiel, B. G. (1992). Efficient market hypothesis. In P. Newman, M. Milgate, & J. Eatwell (Eds.), New Palgrave dictionary of money and finance. McMillan.

Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of Economic Perspectives, 17, 59–82. https://www.aeaweb.org/articles?id=10.1257/089533003321164958. Accessed 02 February 2021.

Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7, 77–91. https://doi.org/10.2307/2975974. Accessed 02 February 2021.

Marshall, A. (1890). Principles of economics. Macmillan.

Merton, R. (1973). An intertemporal capital asset pricing model. Econometrica, 41, 867–887. https://doi.org/10.2307/1913811. Accessed 02 February 2021.

Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53, 433–443. https://www.jstor.org/stable/1809167. Accessed 02 February 2021.

Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48, 261–297. https://www.jstor.org/stable/1809766. Accessed 02 February 2021.

Murphy, J. J. (1999). Technical analysis of the financial markets: A comprehensive guide to trading methods and applications. New York Institute of Finance.

Nguyen, T. L. T., Laratte, B., Guillaume, B., & Hua, A. (2016). Quantifying environmental externalities with a view to internalizing them in the price of products, using different monetization models. Resources, Conservation and Recycling, 109, 13–23. https://doi.org/10.1016/j.resconrec.2016.01.018. Accessed 02 February 2021.

Nobel Prize. (1997). For a new method to determine the value of derivatives. The Nobel Prize. Press Release. https://www.nobelprize.org/prizes/economic-sciences/1997/press-release/. Accessed 02 February 2022.

Nordhaus, W. D. (2018). Climate change: The ultimate challenge for economics. Nobel Prize Lecture. https://www.nobelprize.org/uploads/2018/10/nordhaus-lecture.pdf. Accessed 02 February 2022.

OECD. (2021). Externalities. OECD. https://stats.oecd.org/glossary/detail.asp?ID=3215. Accessed 02 February 2022.

Papazian, A. V. (2004). An endoscopy on stock market winners and losers. Unpublished PhD Dissertation. Cambridge University Judge Business School Library.

Pigou, A. C. (1912). Wealth and welfare. Macmillan and Co.

Pike, R., Neale, B., Akbar, S., & Linslley, P. (2018). Corporate finance and investment (9th ed.). Pearson.

Reinganum. (1981). Misspecification of capital asset pricing: Empirical anomalies based on earnings’ yields and market values. Journal of Financial Economics, 9, 19–46. https://doi.org/10.1016/0304-405X(81)90019-2. Accessed 02 February 2021.

Rhea, R. (1932). The Dow theory. 12^th Printing. Barron’s.

Rom, B. M., & Ferguson, K. (1993). Post-modern portfolio theory comes of age. Journal of Investing, 3, 11–17. https://doi.org/10.3905/joi.2.4.27. Accessed 02 February 2021.

Roll, R., & Ross, S. A. (1980). An empirical investigation of the arbitrage pricing theory. The Journal of Finance, 35, 1073–1103.CrossRef

Rosenbaum, J., & Pearl, J. (2013). Investment banking. Wiley.

Ross, S. A. (1976) The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13, 341–360. https://doi.org/10.1016/0022-0531(76)90046-6. Accessed 02 February 2021.

Ross, S. A. (1978). The current status of the Capital Asset Pricing Model (CAPM). Journal of Finance, 33, 885–890. https://doi.org/10.2307/2326486. Accessed 02 February 2021.

Rubinstein, M. (2006). A history of the theory of investments. Wiley.

SFPUO. (2018). Climate Risk Analysis from space: Remote sensing, machine learning, and the future of measuring climate-related risk. Sustainable Finance Programme. https://www.smithschool.ox.ac.uk/research/sustainable-finance/publications/Remote-sensing-data-and-machine-learning-in-climate-risk-analysis.pdf. Accessed 02 February 2021.

Sharpe, W. F. (1963). A simplified model for portfolio analysis. Management Science, 9, 277–293. https://www.jstor.org/stable/2627407. Accessed 02 February 2021.

Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19, 425–442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x. Accessed 02 February 2021.

Sharpe, W. F. (1975). Adjusting for risk in portfolio performance measurement. Journal of Portfolio Management, 1, 29–34. https://doi.org/10.3905/jpm.1975.408513. Accessed 02 February 2021.

Sharpe, W. F. (1994). The Sharpe ratio. The Journal of Portfolio Management, 21, 49–58. https://doi.org/10.3905/jpm.1994.409501. Accessed 02 February 2021.

Simon, H. A. (1983). Reason in human affairs. Stanford University Press.

Simon, H. A. (2001). Rationality in society. International Encyclopaedia of the Social & Behavioral Sciences, 12782–12786. https://doi.org/10.1016/B0-08-043076-7/01953-7. Accessed 02 February 2021.

Stout, L. A. (2012). The shareholder value myth: How putting shareholders first harms investors, corporations, and the public. Berrett-Koehler Publishers.

Taleb, N. N. (2007). The Black Swan: The impact of the highly improbable. Random House.

Watson, D., & Head, A. (2016). Corporate Finance: Principles and Practice (7th ed.). Pearson.

Williams, J. B. (1938). The theory of investment value. Harvard University Press.

Xi, D., Yan, L., Rapach, D. E., & Zhou, G. (2022). Anomalies and the expected market return. The Journal of Finance, 77, 639–681. https://doi.org/10.1111/jofi.13099. Accessed 20 February 2022.

Yescombe, E. R. (2014). Principles of project finance (2nd ed.). Academic Press.

Title: Finance: A Value Paradigm and Equations Without Space
Author: Armen V. Papazian
Publisher: Palgrave Macmillan UK
Book: The Space Value of Money
Print ISBN: 978-1-137-59487-7

Electronic ISBN: 978-1-137-59489-1

Copyright Year: 2022
DOI: https://doi.org/10.1057/978-1-137-59489-1_2