Advances in
Financial Education

This paper describes the implementation of a one-hour classroom trading simulation developed by the author when he was a trader at the Chicago Board of Trade. Pre-requisite knowledge consists of market efficiency concepts, and the market-making process. The simulation involves putting students into teams of 4 or 5 (7 or 8 teams maximum) which function as OTC dealers/market-makers in a novel asset market. The students have intimate knowledge of certain characteristics of this asset, but not full information. Teams post bid and ask prices for the asset and trade only with other teams. After each round of trading, participants revise their markets. Inevitably, students find that the effective bid/ask spread in the market narrows purely as a function of trading since no new information is provided and that their "ignorant" market moves steadily towards efficiency. Behavioral and market micro-structure concepts are reinforced by the moderator who can also include variations such as new information and announcements to illustrate widening spreads, market volatility, "over-reaction" and mean reversion.

I present two classroom exercises designed to increase student understanding of the pricing of bonds. In the first, students identify the appropriate discount rate based on alternative investments and then the appropriate price of three bonds through a process of competitive bidding. In the second exercise, students bid on either corporate bonds or Treasury Bills, following current Treasury auction rules. The active learning nature of the exercises gets students involved as they consider (1) risk and return, (2) alternative investments (yield determination), and (3) competitive bidding (the price discovery process). Each exercise, including discussion, fits into a 50-minute class period.

This research was undertaken to determine which capital budgeting techniques U.S. technology companies are currently using and to ascertain if they had changed their emphasis on the use of capital budgeting techniques in the last ten years. A survey was sent to 319 technology companies asking questions concerning capital budgeting techniques used and changes to the techniques used. The responses indicated that payback, net present value and internal rate of return are the techniques used most often. Perhaps the most important finding of this study was that 68.3% of the respondents indicated that their companies do not use capital budgeting techniques.

Students in introductory finance classes are confronted with new mathematical techniques and simultaneously, economic models that rely on equilibrium pricing and opportunity costs. The purpose of this paper is to show the intuition and derivations of some of the frequently used finance equations using simple algebraic techniques so that the math is easy to understand, but the intuition is not lost. The derivations covered include annuity equations, cash flow identities, Euler’s number (e), the CAPM, the constant growth model, and the Modigliani and Miller capital structure propositions.

In this study, we show that the number of papers published by an individual in a broad set of journals is a poor predictor of the number of citations the individual receives: the former explains less than 7% of cross-sectional variation in the latter. We find, however, that the number of papers in the top four journals explains about 20% to 30% of cross-sectional variation in the number of citations. The number of papers published by an individual in a broad set of both high- and lower-quality journals increases with the number of years since graduation. The number of papers in the top four journals, however, does not increase with the number of years since graduation, indicating that the likelihood of publication in the top journals declines as people get older.

Recent empirical investigations of randomly formed portfolios imply that the number of securities needed to create well-diversified portfolios has substantially increased in recent years. We examine the standard deviations of equal-weighted and value-weighted portfolios of industry leaders. For the last three decades, equal-weighted portfolios of less than 30 securities randomly formed from industry leaders achieved the same level of diversification as the S&P 500 index. In addition, the results suggest equal-weighted portfolios are more diversified than value-weighted portfolios.

Since 1963, AIMR has administered nearly 400,000 CFA examinations and more than 35,000 investment professionals have earned the right to use the charter. Today, the CFA designation is recognized worldwide not only to the professionals, but also to their clients as one of the most prestigious and respected designations in the financial service industry. By 2002, more than 28,000 candidates live in Asia. Obviously, Taiwan is facing significant competition in the financial service industry from other Asian nations, especially from Japan, Hong Kong, Singapore, South Korea, and Malaysia. Consequently, it is urgent to increase investment professionals’ competitive advantages via promoting the CFA designation in Taiwan after the country joined the World Trade Organization in January 1, 2002. From this point of view, the results of this study will help finance education faculty and students in Taiwan realize the understanding and acceptance of accreditation for chartered financial analyst as perceived by selected finance students. It will also help those departments design more appropriate curriculum in their finance emphasis.

An ongoing project incorporating real data is a valuable addition to an undergraduate investments course. In this paper, I describe how such a project can be modified to allow students to investigate current events. I also describe my students’ reactions to the increased data and analysis requirements this modification entails.

This paper argues that a new topic on investment inefficiencies should be introduced in the teaching of Corporate Finance. First, we analyze under-investment overinvestment processes that arise from the conflicts between the main stakeholders. Then, several mechanisms to mitigate both processes are proposed. The empirical evidence supports this approach, and allows us to propose a new phase in the Projects Evaluation System. This phase consists of identifying the abovementioned conflicts and establishing mechanisms to mitigate the investment inefficiencies. This approach would bring about a noticeable improvement in the teaching of Corporate Finance and could be easily implemented in the syllabus and textbooks.

This paper provides a ranking of the academic standing of finance departments based on faculty representation to the editorial boards of leading core finance journals. The purpose of the study is to examine whether an analysis based on editorial board representation for a small number of leading core finance journals can identify the top research finance departments just as capably as an expanded examination based on a much larger set of journals. By focusing only on journals that are universally recognized to be the top journals in finance, the editorial board membership method applied in this study clearly saves time and can be easily done at regular intervals. The method also avoids controversy caused by volatility in journal quality ratings associated with the use of a larger set of journals. The study also shows by comparisons that most of the institutions that are highly ranked for editorial board representation are also highly ranked in previous studies of research productivity based on citation analysis or publication counts.