NOBEL-EST IN ECONOMICS
THREE AMERICANS SHARE PRIZE FOR CORPORATE FINANCE THEORIES
Author: By David Warsh, Globe Staff
Date: Wednesday, October 17, 1990
Page: 37
Section: BUSINESS
Three American founders of modern corporate finance won the Nobel Prize
for economics yesterday for a series of contributions in the 1950s and 1960s
in which they created the intellectual framework with which money managers
evaluate the risks and rewards of their investments.
Everyone from newly minted MBAs and lofty pension managers to Eastern
European entrepreneurs uses their tools to calculate the cost of capital and
the rate of return on various investments, mainly stocks and bonds.
- Harry Markowitz, 63, of the City University of New York, was cited by the
Swedish Academy of Sciences for developing the theory of portfolio choice.
- Merton Miller, 67, was honored for work on the effect of firms' capital
structure and dividend policy on their market price.
- William Sharpe, 56, was hailed as the author of the capital asset pricing
model, the device that gave Wall Street the concept of the "beta" -- a
coefficient designed to measure its riskiness and volatility relative of a
particular stock relative to the performance of the stock market as a whole.
It was the first time that the Swedish Nobel committee cited three
economists, though dual awards have been common enough in the 22 years since
the prize was first awarded in 1969.
Several finance specialists said the late John V. Lintner Jr. of the
Harvard Business School would have shared the prize had he lived, for having
devised a capital asset pricing model in parallel with Sharpe. Lintner died in
1983.
Eighteen of the first 30 winners of the prize for work in economics have
been Americans.
In Stockholm, economist Assar Lindbeck, secretary to the Swedish Academy,
said, "Each of them gave one building block. The theory would have been
incomplete if any one of them had been missing. Together they created a
complete picture of theory for the financial markets which has had great
importance."
Colleagues said the three men never worked together much, but rather built
on one another's work in journals, over a period of 10 years. Miller, a Boston
Latin graduate and a member of the Harvard College Class of 1944, spent his
war years at the Treasury Department "trying to think of new taxes."
He turned up at Carnegie Tech in Pittsburgh in 1953 -- it was then the
center of the new wave in business schools -- and immediately teamed up with
Franco Modigliani, with whom he did much celebrated work in corporate finance.
MIT's Modigliani won a Nobel Prize in 1985.
Markowitz, a native of Chicago, built on the earlier thinking by Yale's
James Tobin about diversification of risk through balanced portfolios. Tobin
was honored by the Nobel committee in 1981.
Sharpe, a Cambridge native, published his seminal paper on the measurement
of risk relative to the stock market as a whole in 1967, while he was a young
assistant professor at the University of Washington. He was hired by Stanford
University in 1970 and retired last year -- to found an investment management
firm.
"Sharpe published his model just at the beginning of the time when
corporations were beginning to diversify, arguing that this was a way of
minimizing risk," Stewart Myers, finance professor at the Massachusetts
Institute of Technology, said yesterday.
"That was at the start of the conglomerate boom, in which everyone thought
diversification was a good thing. We now see that contributed very little to
corporate performance. If anything, we've learned to mistrust diversification
and to value focus.
"What Sharpe showed was that the financial markets . . . are only
concerned with the risk that they companies can't diversify away. Today,
nobody argues that you can lower the cost of capital by diversifying. It
turned out that the theory was right."
Indeed, the skien of work begun by Markowitz, Miller and Sharpe has won the
respect of even the hardest-headed money men of Boston's State Street and
other centers of money management around the country. John C. Bogle, who heads
the Vanguard Group of mutual funds in Valley Forge, Pa., put it this way, in
the introduction to a recent collection of technical papers:
"While there is a lot of witchcraft in the academic lore, a certain naivete
among the practioners about what is truly susceptible to proof, and far too
much reliance on the misbegotten idea that the past is inevitably prologue to
the future, the most solid academic thinking, however complex, abstruse and
complex, is worth even a busy executive's persusal. For sound theory, sooner
or later, will find its way into actual practice, and into the investor
marketplace as well."
WARSH ;10/16 CORCOR;10/17,18:04 NOBEL17
|
