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Corporate finance is a staple of any business school degree. You must learn how to discount cash flows and the language around it, the weighted average cost of capital, dividends and more. Don Chu can discount cash flows in his sleep. He's founding editor and editor in chief of the Journal of Applied Corporate Finance, as well as one of the founding partners of the corporate finance advisory stern Stwart and Company.
He's also the author of the book out in February, The Making of Modern Corporate Finance, A History of the ideas and how they help build the wealth of nations. Don joins us from New York. Don good to have you on the program. Why should people who are not in finance care about corporate finance?
You, guys, corporate finance has tremendous power to affect their live The productivity of corporations is what ends up paying for the health, welfare and general well being of the rest of US. Private sector productivity is Adam Smith told us two hundred and fifty years ago that really creates economic and social wealth.
What specifically about the US and US corporate finance has kind of pushed up the stock market and the economy in the United States over the last few decades.
Really.
Yeah, Now, I argue my book that the corporate America was failing in the seventies because it had turned itself into bloated conglomerates, collections of unrelated businesses that were unable to respond to the high inflation that was the result of bad public policy.
This led to a at.
That point, court investors had virtually no control over these companies, and so what we saw in the eighties was a reassertion of investor power over corporations, the ability to tear
apart these inefficient conglomerates. Basically a restoration of what corporate finance was like in the nineteen twenties when JP Morgan used to own large positions debt and equhen he sat on boards made strategic decisions for fifty years, especially going through Glass Stiegel and the Great Depression, professional managers gradually
assumed control of all decision making. So this was a reversal of a trend, you know, going back after fifty years to allowing investors to reassume control of corporations, and the American system is almost unique in the sense that investors really have voice and power and control. So I would argue that shareholder activism is the secret sauce of the the productivity of the US economy.
Where do you see things moving right now? You mentioned Otis Smith, So that's where I gotta go, because I don't think out of Smith would approve of the tariff policy of the Trump administration. Certainly he writes aboutations. Yeah, I mean, what do you what do you make of it? And what do you make of what's happening in Washington? And what does that mean for corporate finance?
I think I think our American institutions are stronger than Donald Trump. They're stronger than Joe Biden. They will they are flexible, They're lean and mean, they will respond to virtually anything that politicians can do to them. You know, I'm being uguistic here, but I understand Trump's capacity to reduce the market value by two trillion dollars of the stock market. But nonetheless, every macro economist I know four years ago was saying we were bound to have a recession.
Now we're starting to hear again the threats we're going to have another recession. My response is corporate America knows.
How to deal with it.
They will respond, and they will They will cut back on failing investments, but they will continue to invest in their growth opportunities as they have for the past forty five years.
Don speaking of kind of macro statistics, you have a whole chapter in your new book about micro based attempts to make macro relevant. Tell us about, you know, this argument that you're making because of course we pay a lot of attention to macro statistics, or that.
You read that chapter.
First of all, I don't think I believe that there's.
A chasm between macroeconomics and microeconomics. I have not seen anybody really pointing to this, and I find macro statistics to be almost you know, they have major limitations. They don't tell us anything about productivity that they're really There are records of transactions. What you see in GDP is you know, sales and transactions.
But what we want to know is.
The productivity of these expenses. What we want to know the consumer surplus. How much would customers actually be willing to pay for some of these goods. None of that shows up in the conventional macro productivity statistics. So the result of this is that macro is a lagging indicator. Macrostat stats are the last thing to tell us about productivity. Robert Solo said, we have productivity today everywhere, but in
the productivity statistics. Well, my argument is that if you want to know where productivity is going, look at the stock market. Look at stock prices, because they reflect consumer surplus. They reflect the productivity of expenditures. And I argue China has had no productivity growth since the global financial crisis. The US has had remarkable productivity growth for the last forty five years. It's not in the status.
Don you have a PhD in English and American literature. I think people who don't know you and they see you write this book might be surprised to hear that somebody with your background, I mean that education background. How does that make you better at analyzing companies?
Well?
It in the act of writing this book. I've been at it for three years now, you know, I've I've been editing the Journal of the PLI of Corporate Finance for forty five years, and this, this book caused me to go back and revisit all these old studies, all the things I thought about corporate finance, and then the need to actually put it down on paper and formulate it in a way that you think other people might be able to grasp. It has been really valuable for me.
Mike Milkan once said to me, don you know I want I would like you to write a book on corporate finance that could be, that could be it's brought down to the level of Walt Disney. And I said, Mike, I can't do that, but I can. I can try as hard as I can. And I really tried to make this book something that, you know, a smart, curious person would be able to understand. There's only five equations in the book, and I apologize for every one of them.
Hey, we only have about thirty seconds left. But I'm wondering about the evolution of corporate finance the way you studied it as an MBA in Rochester to what you have seen now. Has it evolved significantly? Has it changed significantly?
Well, you know, it has evolved from Milton Friedman's version of capitalism as the pursuit of profit to something that I call that Michael Jensen has called enlightened value maximization
and that it's really it's long run value maximization. It's completely consistent with Freedman's view, but it means that the corporation had to pay much more attention to all their stakeholders, you know, their employees, their suppliers, the regulators, tax collectors, but they also you know, you have to do it in such a way that you're not reducing the value and the competitive strength of the firm. Do good things for society, but make sure you're not destroying value.
Don appreciate you joining us, congratulations on the new book. Don Chu was founding editor and editor in chief of the Journal of Applied Corporate Finance. He's also the author of the new book, The Making of Modern Corporate Finance, A History of the ideas and how they build the Wealth of Nations. US stocks climbing for a second day. They extended that recovery from a sharp drop that reached
ten percent last week. Industrial and energy shares rallied on economic data that well missing forecast was able to quell concern about an imminent recession. More than ninety percent of the companies in the S and P five hundred rows overshadowing a slide in most megacaps and perhaps exemplifying that. Check this out. An equal weighted version of the benchmark climbed one point three percent from where we bring in Leslie Mark. She's chief investment officer of Mackenzie Investments. She
joins us from Toronto. Leslie, good to have you this afternoon. Is the worst of this slide behind us?
Well, nice to be here.
And I'm not sure if the worst of this slide is behind us.
It's hard to say.
I mean, I think we're going to see a lot of clarity leading into April second, when we will get more information around reciprocal tariffs and potential sectoral tariffs. So I do think that the best case scenario is sort of oscillating market on the equity side between now and April second. It's hard to see market surge materially higher between now.
And then, Leslie. To go really short term, we saw today, you know, some of these megacap tech stocks falling, Wall small caps were higher, the equal weighted index was higher. What does that kind of tell you about what's really driving investors right now?
Well, I think it's really a concern around growth and a lot of the megacap stocks obviously have had high growth, high momentum, high valuation, and what we have been seeing for a while now, not just since we've had this sort of tariff situation, has been a rotator and a broadening out in the market and looking towards better valued opportunities.
And that's really been a theme within the United States, but also also globally, and that's where you've seen big moves in areas like European equities as well.
Is this the year finally for European equities? Or maybe a better way to ask this is, is this finally the year that the US doesn't overperform the rest of the world.
Well, I think that there.
Is actually a very strong thesis that would support that. You know, for the last few years or the last decade, maybe I should say, the thesis has really been about valuation.
And the thing is valuation is never really what drives a rotation.
There always has to be a catalyst, and I actually do think we have a catalyst here, and that catalyst is a real change and shift.
You know, there is a thesis around US.
Exceptionalism really being driven by fiscal spending and driving the deficit higher and obviously what we're seeing right now is a period of disruption, the period that comes from moving spending away from the fiscal side to business investment, which is actually, you know, a policy that makes a lot of sense, particularly when your deficit is so high, it's a necessity to do that, So you know, I think that that policy makes a lot of sense.
But on the other hand, it.
Is creating a bit of a spending gap here that's going to impact US GDP growth. Conversely, you're seeing the opposite happen in Europe. You're actually seeing where there's been more fiscal restraint. Now what we're starting to see is sort of an opening up of the fiscal wallet, something we haven't seen for a long time, particularly in.
Germany with defense spending.
And that's what's really driving the equity investment or focus on European equities. So there actually is a fundamental investment thesis that does support the outperformance for European equities.
Right now, you mentioned GDP and I'm wondering how you're thinking about GDP projections. We have the FED meeting later this week where the Central Bank will release its SEP projections and they will project where they think US growth is going in US inflation. What's on your mind now when you think about GDP.
Well, I think the Fed's in a bit of a difficult spot because it's really focused on the information that it has today and there is a lot of uncertainty coming with the economy now going forward in the growth projections, and I just can't see the FED really being preemptive about that. So the Fed's going to assess the data that it has and that's going to tell them to stay on the sidelines.
On the other hand, they do have.
To be prepared for a big shift because what we're starting to see signs of is almost like a freezing in behavior. The consumer is starting to freeze, businesses are starting to freeze. Without policy certainty, people are having a hard time making spending decisions. I mean, I'm sure you see it, you feel it yourselves, see it in your communities.
But we're also hearing.
This pretty consistently from corporates as well, that when they think about making, you know, five, ten, fifteen year capital decisions, they need to have more visibility on what that is going to look like for them and what the return profile will be for them.
So I do think that we are going to.
Have several areas of the GDP formula that could be at risk for lower expectations over the short to medium term. But that doesn't mean that we're not set up very well over the longer term. And this is really the sort of short term pain for long term gain thesis.
Has Powell's job gotten any easier given what we've seen with financial conditions over the last couple of weeks, a little bit of a sell off in stocks, We've seen a rally in rates, yields come down. This is this make his job easier?
Well, Powell can join the long lineup of people whose jobs have become much more difficult over the last couple of months.
Yes, I mean it's.
Because you think his job has become more difficult.
Yes, yes, yes, yes, I think I think. I think it's definitely more difficult.
Because he's he's in a situation where he's, you know, having to make decisions on backward data that could look very different from forward looking data.
I think, you know, central bankers around the world.
Are experiencing a more challenging environment right now as we see all of these shifts around how money is spent. And you know, as I use the German example of a shift from more you know, lower interest rate monetary stimulus towards fiscal The US is sort of in the opposite situation where it's moving away from fiscal and eventually if it's experience, if the United States experience is a slowdown in GDP, growth will have to move towards easy
monetary policy. So you know, that's likely in the cards for the future, depending on how growth plays out.
But we have seen more and more views.
Around you know, of course, there are people that are calling for potential for recession. I would say even calling for a soft landing will make the FED want to think more dubvishly about the future.
I want to go back to tariffs for just a moment, because you know, I'm looking back at the notes that you send over to us about how you know, there's this on and off again reddick about the tariffs, and everyone right now feels kind of frozen. If you're an investor, if you're a business leader, you just are kind of in like a wait and see mode to see what happens with the tariffs. When do you see markets kind
of moving on from tariffs? How long are you're going to have to be kind of like dealing with headlines, and investors is going to have to be waiting on the sidelines until things are smoothed out.
Yeah, well, I do think the next catalyst, as I mentioned, is April second, when the President will have all of the trade reports on his desk and he will be working with his team to make a decision around the way forward as pertains to reciprocal tariffs and sectoral tariffs.
Maybe something else that's quite encouraging is today we heard from Jamison Greer that there's the sense of wanting to bring a little bit more process around the approach towards tariffs, and so for an investor or for the investment community, that's really important because the strategy might be a good strategy, but so far the execution has been very chaotic, and so what we want to see is process and methodology around the tariff decisions, and then I think will feel
more comfortable with the outlook for the market when they know what the scope of tariffs is going to be. Today, to your point, we really don't know, and we've had environments over the last month or so where that has really changed day to day and in a very surprising way I would.
Say, Leslie, you're joining us from Toronto. So I'd be remiss if we didn't ask just about what the scuttle but has been with regard to the way the President has been talking about Canada over the last few months. What are you guys talking about at work? How are you thinking about his comments about Canada becoming the fifty first state, the change in leadership in Canada and the way that Mark Karney has promised to prevent that from happening. What do you make of all this?
Well, Canadians are very proud about their country and they certainly don't see themselves And I'm generalizing, but I would say the majority, the overwhelming majority of Canadians, do not see themselves becoming a fifty first state. We have a democratically elected prime minister, we will have an election soon. We feel very strongly about the potential for our country, the important and we recognize the importance of our relationship
with the United States as a trading partner. So I think for most Canadians, they've been very surprised by how things have gone in the first six weeks or so of this administration, and they're definitely thinking about how we need to look at the future around our relationship with our biggest trading partner, and it's been a mutually beneficial relationship and I think most people that participate in that relationship would.
Agree with that statement.
And so that's what we want to see, going back to that mutually beneficial relationship, where there is a mutual respect towards our leadership, towards our people, war's our relationships.
Leslie Marx really appreciate you joining us today. Leslie Marx is a CIO of Mackenzie Investments.
This is Bloomberg Business Week, insight from the reporters and editors that bring you America's most trusted business magazine, plus global business, finance and tech news as it happens. Bloomberg Business Week with Carol Masser and Tim Steneveek on Bloomberg Radio.
It is Bloomberg BusinessWeek. I'm Tim Stenevek and that is Emli Gerfao in for Carol Masser this afternoon. The big question I have is is there a worse time to be a college president? As public opinion on higher education continues to sour and the Trump administration threatens huge spending cuts, to say nothing of the royling protests or crippling sticker shock campuses are on edge, so right, Anne, Riley Moffatt,
and Bradstone for Bloomberg Business Week. Bradstone is the editor of Bloomberg Business He joins me here in our San Francisco bureau. Talk about timing for this story. I mean, this was kind of perfect timing to see.
Yeah, we actually interviewed five We brought together five university presidents at the end of February, and that was one week before the federal government, before the Trump administration threatened to withdraw four hundred million dollars in funding from Columbia University. So yes, in some ways the timing was great because there was these these clouds were on the horizon. In other ways, this publishing this package on higher education has
is like trying to jump onto a moving horse. Things are moving very quickly.
Yeah.
I mean even today we got Harvard News and we got like, you know, exclusive schools selling bonds at a really high rate. Right now, the move the news is happening very quick. The decision makers you spoke to at these top universities, they were public and private schools, They were large schools and small schools. They were liberal arts schools and state schools. It really runs the gamut. Who are these people?
And they're the brave few. We put out the call far in line and look, I mean, this is a tough time for university presidents. You said it in the introduction, maybe the hardest job in America right now. Not only the pre Trump factors of rising tuition costs, dropping mail enrollment, the ambiguity around test scores, protests in twenty three and twenty four, and then the kind of post Trump factors, the specter of an endowment tax, NIH cutting funding, and
now the threats around DEI and anti Semitism. But really it's the administration viewing universities as a source of elitism and something of the enemy. So yes, we got the presidents of New York University, Marist University, Grinnell College, the University of Colorado A Boulder, and the University of Rhode Island all together in a room in New York City to hash out these issues.
Rad I found it interesting that this word crisis came up multiple times in your article. I mean, how much of the job of being a college president is now a job of crisis management?
I don't think Historically it was one.
I mean, I think this was you know, this used to be the statesman role. I don't know if we could say it was ever particularly easy. But the thing that has really happened, I think probably starting with October seventh, twenty twenty three, and the attack on Israel from Hamas, there have been a set of constituencies at universities that are all whose interests are all diametrically kind of opposed.
You have students, particularly at some of these elite universities, particularly at mi alma mater Columbia, inheriting the mantle of student activism and protest. And then you have alumni that are very much against us on campus activism, that feel like the college community experience has been co opted. You've got the federal government now with its agenda, saying that the campus has moved too far left. These are places of liberal thought and anti conservative thought. You know, take
those arguments or leave them. But if you're a university president right now, you're kind of buffeted by all these different wins. And I think it was on display when the presidents of Harvard and Yale and eventually Columbia were asked to testify in twenty twenty four and basically ended up all losing their jobs because there's really not an easy way out of all this conflict.
Yeah, it's been pretty remarkable to watch, and I guess when you explain it that way, it makes sense as to why university presidents were a little reticent to get in a room and speak with the editor of Bloomberg BusinessWeek.
It goes beyond though protests, Brad, because there are questions you raised in hear about shifting demographics, things that have been playing out over the long term, but also recently of funding losses for these schools and the importance of these universities providing employees and leaders for the next generation
of American businesses. And there seems to be this tension right now that's playing out with maybe a lack of understanding of the importance of that federal funding going into training those people who make the next innovations.
And that's where I think the roundtable really really was an excellent exercise. I mean, they came together and they really made the argument that universities matter, that these are drivers of scientific and medical research, that this is a magnet bringing the best and brightest from around the world to the United States and making the case for knowledge for research and saying this strengthens the United States and.
Why would you ever kneecap it?
And so yes, there was also the private industry argument, Justin Schwartz, the chancellor of University Colorado a Boulder, saying that business needs a human capit supply chain, and that is the role of universities. And then if you undermine that, talent gets cut and you handicap the US in its direct competition with China and other countries. They also made the point that you know, the US is already kind
of lagging a little bit. We used to lead in patents, in the number of research papers published.
We're not number one anymore.
So they're making the argument this should be a time of reinvestment and not curtailing for political reasons. The financial foundation of these universities.
You asked a very short and pointed question, is college too expensive? What did the presidents have to say to that question.
I think they all agreed. You know that there are investments that they have had to make to keep up with rising expenses and the quality of life for students. They also make the point, maybe somewhat cheapishly, that this is still a great ROI that college is one of the best investments a young person can make.
But they talked about alternative.
Things are trying to do, like no loan financing for students and making sure their students aren't graduating with a load of debt that weighs them down in their careers. But I think it's sort of an unsolved problem, and it's interesting to me that these are the best minds in the country and the challenge of rising tuition is one that has yet to be solved.
Linda Mills, when asked about the increasing number of people questioning the value of college, she referred to the college as a whole in universities as a whole, as an industry. And I'm wondering how you view that word is higher education in industry?
So yes, Linna Mills is the president of NYU. It is an industry, right.
I mean, these are.
Massive, massive institutions with incredible endowments and investment arms, and particularly in New York City, great real estate holdings, and they are corporations under themselves. They operate with a very unusual set of circumstances. They're generally nonprofit institutions, and as we've been really finding out this week, they get an enormous amount of their income from the federal government, and I think in some cases it's almost like one one third.
And so they're also they had they serve a high profile public purpose, and they're quite politically vulnerable in this in this environment, and so I think what we're seeing now is a lot of these universities really try to get on the right side of of the Trump administration, as many companies are doing. Perhaps that's the best evidence that it is in industry. Just like many companies are scrubbing their websites and they're all their public communication of
the phrase DEI. You know, a lot of universities are doing that as well.
Brad, What were the presidents hopeful about? They are obviously working with, you know, the future generations of America. What jumped out to you in their responses?
Yeah, we did, We did ask that, But look, I'm not going to pull any punch here. I think that, you know, this is a tough time for them. You know, there were things that we talked to them about, like declining mail enrollment that they you know, it's sixty forty on some college campuses that they just don't have an answer to right now. They say, you know, these problems are starting in early education, that men lack role models. Right now, you know, the political situation is becoming increasingly
difficult for them. You know, we did ask them what they were hopeful about the fact that you know, they still have you know, dynamic campuses and tens of thousands of students engaged in you know, cancer research and finding the next drug and understanding you know, maternal health and all those topics that are so important that that keeps them going. But you know, by and large their attention has had to be diverted to some of these much more difficult issues.
Brad Stone he's the editor of Bloomberg a business Week. Check out everything in a Bloomberg business Week at bloomberg dot com, slash business Week, and of course, on the Bloomberg terminal.