Finance, Theoretical and Applied

Abstract

Like Caesar's Gaul, corporate finance is divided into three parts: theoretical, empirical, and normative. Important advances in any one of these three typically generate good ideas for the other two. I have been fortunate not to specialize in one part only. This review covers the history of capital structure theories, including the trade-off and pecking-order theories, and takes a skeptical view of how those theories have been tested so far. I give roughly equal space to normative, practical applications, including adjusted present value (APV), the valuation of real options, and the application of modern finance to regulation, insurance, the valuation of R&D, and the role of risk capital in financial institutions. Looking back, I realize that the supply of intriguing financial questions is inexhaustible.