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Finance: Historical Perspectives

lic offering of stock? How will a new investment project FINANCE: HISTORICAL
affect the return investors require on a company’s stock? PERSPECTIVES
Although the CAPM does not fully withstand empirical
tests, it is widely used because of the insight it offers and Finance is a field of specialization that studies all aspects
because its accuracy suffices for many important applica- of obtaining money and making decisions about the allo-
cation of that money. There are many segments of this
tions. Although the CAPM is a quite complex model, it
can be reduced to five simple ideas: field by type—corporate finance, federal government
finance, municipal finance, not-for-profit finance, and
• Investors can eliminate some risk (unsystematic risk) personal finance. This brief discussion will be an overview
by diversifying across many regions and sectors of corporate finance in the economy in the United States.
• Some risk (systematic risk), such as that of global In the United States, major corporations and the
recession, cannot be eliminated through diversifica- financial institutions with which they associate are regu-
tion. So even a basket with all of the stocks in the lated by the U.S. Treasury, which implements fiscal and
stock market will still be risky monetary policies; and the U.S. Congress, which enacts
laws and regulations, intersect in their interests. A driver
• People must be rewarded for investing in such a
risky basket by earning returns above those that they of finance in the United States is the goal to maintain full
employment and to achieve a specified level of economic
can get on safer assets
growth. Corporate finance is critical to such a goal.
• The rewards on a specific investment depend only The history of corporate finance in the United States
on the extent to which it affects the market basket’s
began with rudimentary, unregulated means of securing
risk
funds in the early years of the newly established nation. By
• Conveniently, that contribution to the market bas- the end of the twentieth century, a level of progress that
ket’s risk can be captured by a single measure— made the United States a financial leader in the global
beta—that expresses the relationship between the community was reached. The success of the finance func-
investment’s risk and the market’s risk tion in corporate America is the result of a combination of
business innovation in the design and strategies of secur-
Finance theory is evolving in response to innovative ing funds and the governmental regulations that ensure
products and strategies devised in the financial market- integrity in financial markets. Yet, problems persist in
place and in academic research centers.
what has become since the twentieth century a complex,
SEE ALSO Careers in Finance; Ethics in Finance; Finance: fast-changing field of specialization.
Historical Perspectives
EARLY AMERICAN FINANCE
BIBLIOGRAPHY In colonial United States, businesses were, for the most
Bodie, Zvi, Kane, Alex, and Marcus, Alan J. (1999). Investments part, small and self-financed. The first settlers, however,
(6th ed.). Boston: McGraw-Hill/Irwin. who had been British subjects, were well acquainted with
Bruner, Robert F. (2003). Case Studies in Finance: Managing for the corporate form of organization. As Joseph Davis
Corporate Value Creation (4th ed.). Boston: McGraw- noted, “before the end of the colonial period a consider-
Hill/Irwin.
able number of truly private corporations had been estab-
Bruner, Robert F., Eades, Kenneth M., Harris, Robert S., and lished for ecclesiastical, education, charitable, and even
Higgins, Robert C. (1998). “ ‘Best Practices’ in Estimating
the Cost of Capital: Survey and Synthesis.” Journal of Finan- business purposes” (1917, p. 4).
cial Practice and Education 8:1, 13-28. Many of these early efforts were unsuccessful, and
Kaushik, Surendra K., and Krackov, Lawrence M. (1989). individuals who invested in them often lost their total
Multinational Financial Management. New York: New York contributions. The nature of financing problems in these
Institute of Finance. early efforts is illustrated by the story of an organization
Stein, Jeremy (1996). “Rational Capital Budgeting in an Irra- called the Society for Establishing Useful Manufacturers.
tional World.” The Journal of Business 69:4, 429-55. In November 1791, the legislature of New Jersey passed
White, Gerald I., Sondhi, Ashwinpaul C., and Fried, Dov an act incorporating this enterprise, which likely manu-
(2003). The Analysis and Use of Financial Statements (3rd factured such products as paper, textiles, pottery, and wire.
ed.). Hoboken, NJ: Wiley. Davis identified this company as “one of the pioneer
industrial corporations of the United States and the largest
and most pretentious of these” (p. 349). Plans for the new
Surendra K. Kaushik
Lawrence M. Krackov corporation were publicly announced, including the
Massimo Santicchia much-criticized strategy of raising capital by issuing pub-

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