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Stocks1Lecture11-StocksOverview:Thestockmarketistheinformationcenterforthecorporatesector.Itrepresentsindividuals'ownershipinpublicly-heldcorporations.Althoughcorporationshaveavarietyofstakeholders,theshareholdersofafor-profitcorporationarecentralsincethecompanyisultimatelyresponsibletothem.Companiesofferdividends,stockrepurchasesandstockdividendstogiveprofitsbacktoshareholdersortosignalinformation.Companiescanalsotakeondebttoraisecapital,creatingleverage.TheModigliani-Millertheoryofacompany'sleverageinitssimplestformimpliestheleverageratiodoesn'tmatter,butincludingbankruptcycostsandtaxeffectsgiveusapositivetheoryoftheratio.Readingassignment:JeremySiegel,StocksfortheLongRun,chapters6,7,8,and9RichardBrealeyetal.PrinciplesofCorporateFinance,chapters16and17Johnson,Simon,RafaelLaPorta,FlorencioLopez-di-Silanos,andAndreiShleifer,Tunneling,AmericanEconomicReview,2000,90(2),pp.22-7.FinancialMarkets:Lecture11TranscriptFebruary20,2008ProfessorRobertShiller:Ibelievethatwestillhaveon,forFriday,StephenSchwarzman.Hesaidhewoulddoit.Ialwaysworryaboutpeoplewhohavesuchimportantbusinessesbecausesomebigdealmaybecomeincrisisorsomething;peoplelikethathavetroublesometimesadheringtoaschedule.AsfarasIknowwe'regettinghim,soIhopethatyouwillallbeabletocomethisFriday,here,attheusualtime.Ifthere'sanyproblemwithhisappearingIwillemailyou.Asyouknow,StephenSchwarzmanisagraduateofYaleCollegeandhe'soneofthegreatstoriesofourcentury.Hecreatedjustaboutthebiggestprivateequityfirmfromscratchin1985andIguesstheyjustwentpublicandtheyhaveahugemarketcap.They'recomparabletooneofthebiggestoldlineinvestmentbanksinNewYork.Hejust--heandPeterPeterson--justcreateditsoIthinkitwillbeveryinterestingtohearhim.Again,you'llhaveachancetoquestionhimaboutwhathe'sdone.IputonthereadinglistTheNewYorkerarticlethat'soutrightnow.Wellactually,Iguessitcameoutacoupleofweeksago,butit'suponoursyllabus.IthinkImightwanttotakeitdownbeforehecomes.I'mgoingtoturn--I'mgoingtoreflectonthisbecausehemaynotbepleasedwiththearticle.It'saveryhard-hittingcriticalarticle.Hehadtobeatoughbusinessmantoarrivewhereheis.TheNewYorkerarticletalksaboutthepriceofhiscondo--orco-op--inNewYork,whichsetsomerecord,andsotheytellthingslikethat.IwasjustyesterdayinLondonandpeopleliketogossipaboutthingslikethat.ThelimodriverStocks2wasdrivingmetotheairportandwaspointingoutthescenesinLondon.Hesaid,youknowthatbuilding?SomeArabSheikhjustpaidonehundredmillionpoundsforthatapartment--thatpenthouseapartment--inthatbuildingandthesameSheikhisorderingaAirbusforhis--oneofthesebigAirbusairplanes--forhispersonalplaneandhe'shavingitplatedwithgoldleaf.Didyouhearthisstory?Doesanyone--isthistrue?Thislimodrivertoldmethisyesterday;hesaidit'sgoingtocosthimfivehundredmillionpoundsorsomethinglikethattodothis.Thesearegossip.Therealsubstanceiswhatthemandoes--orwomandoes--fortheworld.So,Igleanedherealistofsomeofthecharitiesthat--StephenSchwarzmanisamajorphilanthropist.HesetupsomethingcalledTheBlackstoneFoundationfromtheBlackstoneGroupandhe'samajordonororcollaboratorwiththeFrickCollection,TheWhitneyMuseum,PhoenixHouse,TheRedCross,TheInnerCityScholarshipFund,NewYorkCityOutwardBound,andtheAsiaSociety.Ithinkthat'stherealthingweshouldtalkabout,notthesizeofhispenthouse.So,Imighttrytofindamoreeven-handedaccountandputthatuponthewebsite.Incidentally,there'ssortofaresemblancebetweenhimandDavidSwenseninthe–well,firstofall,they'rebothphenomenallysuccessful,buttheybothareemphasizingalternativeinvestments.They'renotstraight-lacedold-fashioned;they'rewillingtotakeexperiments.Ithinkheshouldbeveryinteresting;that'sFridayat9.IwanttotalkaboutthestockmarkettodayandIthoughtIwouldkeepitmoreorlessbasicbecauseIthink--Iwanttoemphasizebasicconcepts.AlotI'mgoingtotalkaboutisModigliani-MillerbutI'mnotgoingtogettoodeepintoit,maybeinyourreviewsectionsyoucangetmoretechnical.I'mgoingtojusttalkaboutitintheveryintuitive,directterms.Whatarestocks?Ithinktheideaofastockmusthavebeeninventedindependentlyatmanytimesinhistory.Thewordsharesisthefundamentalword.Supposeyouarestartingabusinesswithsomebody--itcouldbeatanytimeinhistory--Babyloniaorsomething--thismusthavehappened.Agroupofpeoplestartsabusinessandtheysay,let'sdivideuptheproceeds.That'sverydirect,isn'tit?Ifwe'reallworkingtogetherwedivideuptheproceeds.Thatmeanswe'reallocatingshares.Now,Idon'tknowhowfarbackitgoesbutitmustbethatinancienttimessomepeoplewouldsay,allrightyou'regoingtobedoingmoreworkoryou'recontributingmoretothisenterprise,we'llgiveyouabiggershareoftheprofits.That'ssobasic,itmusthavehappenedamilliontimesandthat'sthebasicideaofthestockmarket.Allitisisthatwe'vegotitmuchmorehigh-flownandmuchmorelegalizedthan--thebasicideaisthatyouhavetohavesharesinsomething--abusiness--andtheideagoesbackclearlytoancientRome.Let'sconsiderabusinessassortofapersonwhoisowned,likeaslave,whoisownedbyotherpeople.Inlaw,thewordpersondoesn'tmeanwhatyouthinkitmeans.There's--inlaw,anaturalpersonisyouandme;people,realfleshandbloodindividualsarecallednaturalpersons.Butwhenwesayperson,italso--that'smoregeneral--italsoincludescorporation.Thewordco