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Operationalism in Finance and Economics

Published online by Cambridge University Press:  19 October 2009

Richard S. Bower  and
John M. Scheidell
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Extract

Recent literature, as it has been developing in this journal and others, suggests that a significant change has taken place in the field of finance. The “new finance” has broader and deeper analytic and empirical content. Its relevant characteristics are: (1) a weakening of the traditional distinction between security analysis and corporation finance; (2) an increased emphasis upon financial management as an integral part of the overall management function; (3) greater emphasis upon the relevance of economic theory in the analysis of financial relations; and (4) more attention to the measurement and testing of hypotheses.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 5 , Issue 4-5 , December 1970 , pp. 469 - 495
Copyright
Copyright © School of Business Administration, University of Washington 1970

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References

1 Manne, Henry G. (ed.), Economic Policy and the Regulation of Corporate Securities (American Enterprise Institute: 1969)Google Scholar.

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7 Samuelson, Paul A., Foundations of Economic Analysis (Cambridge: Harvard University Press, 1947)Google Scholar. The original version was submitted to the David A. Wells Committee of Harvard University in 1941.

8 Papandreou, Andreas G., Economics as a Science (Chicago: J. B. Lippincott Co., 1958Google Scholar).

9 Sherman R. Krupp, “Types of Controversy in Economics,” The Structure of Economic Science.

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12 Modigliani, Franco and Miller, Merton, “The Cost of Capital, Corporation Finance, and the Theory of Investment,” American Economic Review, Vol. 48, No. 3 (June 1958), pp. 261–297Google Scholar.

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15 Brittain, John A., “The Tax Structure and Corporate Dividend Policy,” American Economic Review, Vol. 54, No. 3 (May 1964), pp. 272–287Google Scholar, and Corporate Dividend Policy (Washington, D.C.: The Brookings Institution, 1966).

16 Baumol, William J., et al. , Earnings Retention and Growth of the Firm, Research Memorandum No. 2 (Princeton, New Jersey: Financial Research Center, Department of Economics, 1968)Google Scholar.

17 Cootner, Paul H., The Random Character of Stock Market Prices (Cambridge, Mass.: M.I.T. Press, 1964), p. 2Google Scholar.

18 See for example, Fama, Eugene F., “The Behavior of Stock-Market Prices,” Journal of Business, Vol. XXXVIII, No. 1 (January 1965), pp. 34–105CrossRefGoogle Scholar, or “Security Prices: A Supplement,” Journal of Business, Vol. XXXIX, No. 1, Part II (January 1966), or “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance, Vol. XXV, No. 2 (May 1970), pp. 383–423.

19 Nerlove, Marc, “Factors Affecting Differences among Rates of Return on Investments in Individual Common Stocks,” The Review of Economics and Statistics, Vol. 50, No. 5 (October 1968), pp. 312–331CrossRefGoogle Scholar.

20 Sharpe, William F., “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk,” Journal of Finance, Vol. XIX, No. 3 (September 1964), pp. 425–442Google Scholar.

21 Lintner, John, “Security Prices, Risk, and Maximal Gains from Diversification,” Journal of Finance, Vol. XX, No. 4 (December 1965), pp. 587–615Google Scholar.

22 See, for example, Stigler, George, “Public Regulation of the Securities Markets,” Journal of Business, Vol. XXXVII, No. 2 (April 1964), pp. 117–142CrossRefGoogle Scholar, and “The Economics of Information,” Journal of Political Economy Vol. IXIX, No. 3 (June 1961), pp. 213–225; George Benston, “The Effectiveness and Effects of the sec's Accounting Disclosure Requirements,” pp. 23–79, and A. H. Meltzer, “On Efficiency and Regulation of the Securities Industry,” pp. 217–238, in Manne (ed.) Economic Policy.

23 A time-sharing computer system has been available to students at the Amos Tuck School since September 1964. The Department of Economics of Florida Atlantic University began its Time-Sharing-Aided Research and Instruction Program 3 years later by leasing a commercial time-sharing system. In the summer of 1970, in-house time-sharing capabilities were made available on the University's Ibm 360. A description of this Tsari Program, including lists of programs used in the program and an explanation of their use, can be obtained from John M. Scheidell.

The achievement of the type of learning environment described here is not done without some direct and opportunity costs, and, although a detailed cost benefit analysis can not be provided here, some ideas can be gained from the Dartmouth experience. At the Amos Tuck School, the 220 first- and second-year Mba students may access the computer from 12 terminals in their classroom building or 18 terminals at the nearby Kiewit Computation Center. There is no direct charge to the students for this use; no sign-up sheets and no formal system of rationing. There may occasionally be a queue for terminals but only during late morning, afternoon, and early evening hours. From a student's point of view, the computer, like the library, offers a free good and he decides how much of this good to use considering a zero price. The institution and its students do pay to have this service available, and the allocation of computer center costs plus direct cost of terminals for the Amos Tuck School was about $160,000 in 1969–1970. Clearly, other things were sacrificed to provide the quality and quantity of timesharing computer power that is available at Dartmouth. At Dartmouth there is a prevailing, strongly held view that the benefits far outweigh the costs. However, the problems in supporting this view are substantial. They involve analyzing revenue feedback effects, incremental gains for students, side benefits of Dartmouth software to firms and schools, etc. We can not deal with these issues here, but the text that follows provides an indication of some of the benefits that may follow from the easy access, nonrationing policy being practiced at Dartmouth.

24 Myers, Barbara C., et al. , LAFFF1 Manual (Dartmouth: The Amos Tuck School, September 1966)Google Scholar.

25 This manual and 15 others are included in Manuals for Computer Programs in Finance and Investments (Dartmouth: The Amos Tuck School, September 1970).

26 This manual is also contained in Ibid.