The Theory of Financial Leverage and Conglomerate Mergers

Wall Street Journal, April 6, 1967, p. 1.

Markowitz Harry , Portfolio Selection, Cowles Foundation Monograph 16 (New York: John Wiley & Sons, Inc., 1959).

Tobin James , “Liquidity Preference as Behavior Toward Risk, Review of Economic Studies, XXV (Feb. 1958).

Sharpe William F. , “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk,” Journal of Finance, IXX (Sept, 1964), 425–442.

Latané Henry A. , “Criteria for Choice Among Risky Ventures,” Journal of Political Economy, LXVII (April 1959), 144–155.

Goshay Robert C. Michaelsen Jacob B. , “Portfolio Selection in Financial Intermediaries: A New Approach,” Journal of Financial and Quantitative Analysis, II (June 1967), 166–199.

Standard and Poor's Corporation Records.

Modigliani Franco Miller Merton , “The Cost of Capital, Corporation Finance, and the Theory of Investment,” American Economic Review, XLVIII (June 1958), 261–297; and “Corporate Income Taxes and the Cost of Capital: A Correction,” American Economic Review, LIII (June 1963), 433–443.

John Lintner has touched upon some of these problems in “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets,” Review of Economics and Statistics, XLVII (1965), 13–37.

In comparing firms in industries with rather different inputs into advertising, research and development, and more conventional capital, it is often necessary to deflate earning returns on reported book values by the ratio of current book to current or proposed market price to obtain meaningful return estimates which can be used in conjunction with portfolio balance models.

Renshaw , “Portfolio Balance Models in Perspective: Some Generalizations that can be Derived from the Two Asset Case,” Journal of Financial and Quantitative Analysis, II (June 1967), 123–149.

See “Fighting Takeovers,” Wall Street Journal, July 11, 1967, p. 1.

Biggs Barton M. , “Conglomerates Can't Keep Making Two Plus Two Equal Five Forever,” Barron's, April 3, 1967, pp. 3, 12–18.

Burck Gilbert , “The Perils of the Multi-Market Corporation,” Fortune, Feb. 1967, pp. 131–135.

A great deal can be learned about synergistic value by studying the two asset case which is comparatively easy to understand. See my “Portfolio Balance Models in Perspective.”

A security is of investment quality, according to Geoffrey Clarkson P. E. , “if and only if it is being bought or being held by other leading trust institutions.” His list of securities which was used to simulate the behavior of one investment trust officer included only 81 securities. Portfolio Selection: A Simulation of Trust Investment (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1962).

Friend Irwin Vickers Douglas , “Portfolio Selection and Investment Performance,” Journal of Finance, XX (Sept. 1965); Renshaw Feldstein Paul , “The Case for an Unmanaged Investment Company,” Analysts Journal, XVI (Feb. 1960), 43–46.

Benishay Haskel , “Variability in Earnings-Price Ratios of Corporate Equities,” American Economic Review, LI (March 1961), 81–94.

Fisher Lawrence , “Determinants of Risk Premiums on Corporate Bonds,” Journal of Political Economy, LXVII (June 1959), 217–237.

Securities and Exchange Commission, Cost of Flotation of Corporate Securities, 1951–1955 (Washington: U.S. Government Printing Office, June 1957); Cohan Avery B. , Cost of Flotation of Long-Term Corporate Debt Since 1935, Research Paper 6 (Chapel Hill, N.C.: School of Business Administration, Univ. of North Carolina, 1961).

Of the 52 annual reports of pooling combinations reviewed by the American Institute of Certified Public Accountants in 1962, 44 included financial statistics for a five- to ten-year period. In only 12 of these cases were the data recast to provide comparative statistics for the entire five- to ten-year period. ( Wyatt Arthur R. , A Critical Study of Accounting for Business Combinations, Accounting Research Study No. 5 [New York: American Institute of Certified Public Accountants, 1963], p. 48).

Much progress has been made in simplifying the arithmetic of portfolio selection so that reasonably efficient portfolios of risk assets can be obtained without resort to mathematical programming. See my “Portfolio Balance Models in Perspective”; and Sharpe William F. , “A Linear Programming Algorithm for Mutual Fund Portfolio Selection,” Management Science, XIII (March 1967), 499–510.