Journal of
Financial Education

Ethics has arrived in the business school curriculum. But what about the curriculum of finance? Can ethics be integrated in any meaningful way into the theory and pedagogy of finance? Given the ever-broader array of topics in finance, should ethics be included at the inevitable expense of something else? Are finance instructors qualified to teach ethics any more than ethicists are qualified to teach finance? In short, are finance educators doing students a service or disservice by devoting class time to ethics? These are the questions addressed here. A menu of three different levels of integration is supplied; each level requiring a different commitment of curricula resources.

Pages 1-17

There is a large and growing body of literature on the research productivity of academics in colleges of business administration. The vast majority of this work focuses on one functional area at a time and provides useful benchmarks for promotion and tenure decisions at the department level, but does not help in college-level decisions. The goal of this paper is to provide a useful benchmark for college-level promotion and tenure decisions. Using publications in top journals from the functional areas of accounting, economics, finance, management, and marketing, we find that publishing in a top journal in accounting, finance, and marketing should be viewed as a similar hurdle, while attaining a top economics publication should be considered somewhat more difficult for the average faculty member in the field because of a concentration of top journal publications in the top departments. By comparison, attaining a top management publication should be considered somewhat less difficult for an average faculty member in the field because top journal space appears to be more open to faculty outside the top departments.

Pages 18-30

In this paper, we use a binomial lattice model to value employee stock option plans (ESO). We focus our discussion on how the special features of ESOs that are difficult to build into the Black-Scholes model can be readily incorporated into a binomial lattice model. We demonstrate the effect on option value of such real-world characteristics of ESOs such as the length of the vesting period, suboptimal early exercise of the option by employees, employee forfeiture rates and varying input parameters to the model. We also compare ESO valuations from the binomial lattice Black-Scholes models. We believe that the lattice model is a more effective teaching tool for ESO valuation than the Black-Scholes model because it can explicitly incorporate vesting periods, suboptimal early exercise, forfeiture rates and changing input values.

Pages 31-50

Most corporate finance textbooks describe the agency relationship between stockholders and bondholders only qualitatively, if at all. Unfortunately, this leaves students with an incomplete understanding of why different security-holders have conflicting incentives with respect to the firm’s underlying assets and capital structure. This paper presents a simple Excel spreadsheet simulation of possible outcomes from a risky project and the resulting payoffs to a firm’s securityholders. I use Excel’s data table feature to demonstrate that stockholders can increase their expected returns at bondholders’ expense by choosing projects with higher volatility and by increasing the firm’s leverage.

Pages 51-67

The academy award nominated documentary, ENRON: The Smartest Guys In the Room can be used as an innovative teaching tool in corporate finance and business ethics. This paper provides information on how the movie can be used as a live case study in both graduate and undergraduate corporate finance classes. Guidelines are provided on how the movie can be used to enhance discussion in the areas of agency theory, capital budgeting, capital structure, bankruptcy, takeovers, information asymmetries, stock valuation and risk and return. Advanced topic questions and answers are provided for advanced finance majors or graduate students along with supplemental reading suggestions. Finally questions and answers are provided to enhance classroom discussion of the many ethical issues portrayed in the film. The ethical issues are categorized as those specific to financial management and those that are general business ethics. The case is versatile and may be used in a variety of finance courses.

Pages 68-94

Evidence from the surveys [Bierman, 1993; Graham and Harvey, 2001] and corporate finance textbooks suggest that internal rate of return (IRR) is the one of the popular investment evaluation criteria, along with net present value (NPV) for capital budgeting projects. Using Compustat® data, we replicate and expand the Internal Rate of Return (IRR) methodology by Fama and French (1999) to demonstrate risk-adjusted returns and cost of capital at three levels: whole economy, industry, and firm level. This application using accounting and market data is an effective teaching tool to students in demonstrating theoretical concepts with regard to investment performance, cost of capital, and capital structure.

Pages 95-110

Students at the College of Charleston frequently disconnect valuation theory from practical equity analysis. Specifically, our undergraduate students pre-viously learned valuation methodology within a vacuum in the sense that they do not understand the underlying rational behind models’ assumptions. To bridge this gap, a finance cap-stone course was created that extends valuation instruction by using an interdisciplinary approach within a business plan context. The business plan approach forces students to examine the assumptions with respect to the firm’s marketing, production, strategic, international and environmental strategies. The purpose of this paper is to describe the structure of the course as well as the written financial feasibility analysis.

Pages 111-127

Our surveys found that our podcasts were popular with our students. While we acknowledge that popular is not synonymous with educational effectiveness, we maintain that student acceptance is the first hurdle. Only time will tell how effective podcasting will be. We learn that our apprehension that podcasting would decrease attendance was unfounded as were our concerns that podcasting would be a hindrance in the classroom and a waste of time for us. Podcasting does raise some issues like effective use of classroom time, ownership of intellectual property, and instructor support. We have views on some of these issues but do not have solutions for them – only our experience and suggestions.

Pages 128-136

Boeing Capital Corporation (BCC) was the leasing and financing business of The Boeing Company (Boeing). The new President of BCC, Walter Skowronski, was appointed in 2003 to revise its mission by only doing transactions that supported Boeing’s business units and to manage risk more effectively through the development of an independent risk department headed by a Chief Risk Officer (CRO).

An unusual problem Skowronski encountered was a lease of six Boeing MD-11 passenger airplanes to a major South American carrier that in 2005 was in default and had filed for bankruptcy protection.

Pages 137-154

"You have been operating the Sapphire Shop from your basement for more than five years now. Why don’t you give up your "day job" and really turn it into a business? I’ll bet you could do it now and I’d like to be your partner."

Pages 155-174

The case deals with a request for a $2 million line of credit by a Peruvian bank, being made to a Miami-based bank. The purpose of the credit is to accommodate customary international department transactions. Essentially, it is about a cross border, bank-to-bank, loan. The credit analyst must take into account several factors, review the financial information of the credit applicant, weigh the bank’s risk exposure, and make a recommendation as to the loan request. The pedagogical objective of the case is to acquaint the student with the issues unique to foreign lending, in addition to the analytical procedures appropriate to determining bank creditworthiness.

Pages 175-184