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Recommended Readings: Finance

 

You have more capital than you think   by Robert C. Merton | Harvard Business Review, November 2005

Thanks to  modern financial markets, managers can ensure that virtually the only risks its shareholders, debt holders, trade creditors, pensioners, and other liability holders must bear are value-adding risks. Those are the risks associated with positive-net-present-value activities in which the company has a comparative advantage. All other risks can be hedged or insured against through the financial markets. In most large companies, equity capital is used to cushion against a great many risks where  the firm does not have a comparative advantage. If it can remove these non-value-adding risks, a company will be able to use its existing equity capital to finance a lot more value-adding assets and activities than competitors. The Nobel prize winner argues that  the potential for creating shareholder value through financial engineering is enormous.