Teaching Finance the Maryland Smith Way

'Value Maximization, Not Profit Maximization'

Nov 07, 2018
Finance

SMITH BRAIN TRUST – Companies run into problems when they focus too much on immediate outcomes. But finance students learn a different approach at the University of Maryland’s Robert H. Smith School of Business. “We focus on value maximization, not profit maximization,” says finance professor Michael Faulkender, associate dean of master’s programs. “Value is measured over the life of the activity, not the current outcome.”

The larger debate students must confront is how to proceed when the interests of different stakeholders clash. “Are we asking firms to act against the interests of shareholders for a common good when their competitors will not make the same decision?” Faulkender says. “This is the question that I pose in our MBA program. If we need coordinated responses, are we asking firms to collude? Or do we need governments to address these externalities in ways that create a common playing field?”

To find the right balance, Smith students start by learning the basic time-value concept of money.

“Organizations must determine how much they are willing to give up today to get an outcome in the future, given that time is going to elapse and risk is going to be realized between now and when that future outcome occurs,” Faulkender says. “So how do we trade off spending money today versus getting benefits in the future?”

How Maryland Smith Teaches Finance: Maryland Smith finance students start by learning the time-value concept of money. Then they learn to forecast the monetary implications of business activities across a range of disciplines.

Once students have that solid foundation, they learn to forecast outcomes based on potential business activities across a range of disciplines. If the organization engages in a marketing campaign, for example, what will the revenue stream look like? Or how will a particular operational structure affect production costs?

“It’s an understanding of the economics in which these various actions are going to take place,” Faulkender says. “You have to take this entire set of disciplines. You ask the question: What are the monetary implications of each of those pieces. Then you model them out and estimate the tradeoffs.”

Faulkender, nominated in 2018 as Assistant Secretary for Economic Policy at the U.S. Treasury, explains the school’s approach in a Maryland Smith video, How Maryland Smith Teaches Finance (2:18)...

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About the Expert(s)

Michael Faulkender's research focuses on empirical corporate finance in the areas of capital structure, risk management, corporate liquidity, and executive compensation. His work has been published in the Journal of Finance, Journal of Financial Economics, and Review of Financial Studies and has been cited in the Wall Street Journal, Washington Post, and The New York Times. He was awarded the Barclay's Global Investors/Michael Brennan Best Paper Award in the Review of Financial Studies in 2013, was runner up for that prize in 2006, and won the Jensen Prize for Corporate Finance – Second Prize in the Journal of Financial Economics in 2013.

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