Finance and The New Economy: Part Deux

The previous teaching tip focused on the emergence of the "new economy" (or is that "e-conomy"?). In a nutshell, it has become apparent that the times, they are a-changin', particularly when it comes to the impact of the Internet on business practices and financial decision-making.

The latest issue of Forbes carries another interesting editorial by publisher Rich Karlgaard entitled "Legacy Shareholders." Consider the following quote:

"Land, plants, and a fortress balance sheet? Your dot.com rival lacks them all. Odd thing, though. Your dot.com rival sports a market cap four times yours."

The thesis of the article is quite provocative, particularly for us teaching and performing research in the area of Financial Management. Mr. Karlgaard continues:

"[T]he answer to this outrageous disparity in market caps can only be: There's no justice. Or the stock market is insane."

"Wrong and wrong. Capitalism is entirely just and sane . . . The problem is your dusty, old, creaking shareholders. They won't let you invest big for change. They're one more of your blasted legacy assets. Year after year you stood before them at the annual meeting and cut a deal, promising them modest growth and a steady dividend check. . . . And while you wooed the shareholders . . . Silicon chip designers on the other coast burned the midnight oil . . . software writers cooked up clever uses for the new powers. . . [t]here bubbled up a new financial technology, with names like venture capital and venture debt."

"What emerges is a huge financial shopping mall of investment choices. It's not your father's general store. . . . In your Dad's time, your promise to shareholders-low risk, a steady dividend check-occupied an aisle or two in the general store. . . Today it's a giant mall. All those many high-risk stocks commanding top prices, well, they're way up yonder, at the other end of the mall."

"So there you are-trapped. In the wildest carnival of economic disruption since the steam locomotive arrived in 1829, maybe wilder, you are stuck at home watching TV reruns with your dear old shareholders."

Whew! Are a lot of decision-makers out of touch? Has the concept of managing for low risk and steady growth gone the way of the beta VCR (or the 8-track tape, or DOS . . .)?

I urge you to find this article and use it to generate discussion of the what the proper role of the financial decision-maker should be in our brave new world. Has it really changed? And if so, how should the paradigms of modern finance change?

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