Hacker News new | ask | show | jobs
by quasirandom 1909 days ago
The last quote from Desair really sums it up nicely, "The language of finance can be insidious. Words like leverage and concepts like diversification can morph from narrow financial terms into much more general ways of understanding the world."

This kind of thinking has infected corporate America, which is optimizing return based measures--typically IRR--rather than profit based measures. That kind of thinking will lead you to believe offshoring your fabs is a good idea, because is reduces assets in the denominator.

On the other hand, financial thinking can help you better understand the world. One of the more powerful insights that comes to mind is Merton's model of corporate capital structure. It turns out that equity is "equivalent" to a long call on firm assets and debt is "equivalent" to a risk-free bond and a short put on assets.

Seeing things this way tells you something about how firms are run. Equity owners (management) have an incentive to increase asset volatility, which increases the call value. This value is taken straight from the bond holders short put. This is why you see buybacks in situations where buybacks seem crazy (Intel in 8/2020).

https://www0.gsb.columbia.edu/faculty/ssundaresan/papers/Mer...
2 comments
lotsofpulp 1909 days ago
> That kind of thinking will lead you to believe offshoring your fabs is a good idea, because is reduces assets in the denominator.

I am under the impression that offshoring fabs is a good idea due to drastically lower labor costs and other costs such as complying with environmental regulations as well as legal costs arising from those regulations. At least it was, and now there may be supply chain advantages to the offshore fabs.

link
mhuffman 1909 days ago
>This kind of thinking has infected corporate America, which is optimizing return based measures--typically IRR--rather than profit based measures.

In uni, this difference was explicitly used to differentiate investors and financiers.

Investors are picky where they put their money and want profit.

Financiers want every dollar always working and covet IRR.

... of course, out in the real world it isn't so cut and dry.

link