Prof. Michael Roberts: Corporate Valuation Course Beneficial for all EMBA Students

Prof. Michael Roberts’ research addresses questions in corporate finance. Broadly speaking, he looks at how firms make financing decisions and the implications of those decisions for firm value. In addition to his research, he teaches in Wharton’s East and West Coast EMBA program and serves as editor of the Journal of Finance.

Q. Your 2005 article, “Do Firms Rebalance their Capital Structures?” is among the top most-cited papers from the Journal of Finance since 2004. What is that paper about?

My co-author, Mark Leary, and I looked at whether firms have an optimal capital structure and, if so, whether they actively adjust toward that optimum over time. We found that they do adjust, but they do so infrequently because of adjustment costs (e.g., security issuance costs, timing with investment opportunities). Further, firms tend to be more sensitive to excessively high leverage than low leverage. In other words, when firms are above their optimal leverage they actively reduce their leverage. However, if they are below their optimal leverage, they are less worried about increasing their leverage.

Q. What do you teach in Wharton’s EMBA program?

I teach Corporate Valuation, which is a finance elective. The aim of the course is to provide students with a strong grasp of valuation fundamentals and the ability to apply these fundamentals to a wide variety of situations encountered in practice. As such, we value many different types of firms, varying by their place in the life cycle (start-up to mature) and their sector of operations (e.g., pharma, tech, manufacturing, etc.). We also value many different types of transactions (e.g., LBO/MBO, M&A, spin-offs, etc.). Critically, the emphasis is on using “live” data and real examples to address the complexities that students will face after they graduate from Wharton.

Q. What types of students usually take your course?

A wide variety! You might think from the course title and its status as a finance elective that it’s just for investment bankers or other finance professionals. But, this isn’t the case at all. The course is accessible to any MBA student with an introductory finance and accounting background.

Additionally, my experience has shown that the class is equally as important to the non-finance major as the finance major. Whether you are in marketing, strategy, operations, sales, etc., an understanding of corporate valuation is critical for several reasons. First, every significant corporate decision will be justified by a valuation, and every employee is affected by these decisions through their task assignments, compensation, and job security. Second, the knowledge of non-finance personnel is critical for a sensible and accurate valuation because their knowledge of markets, product potential, competitive threats, operating costs, etc. are some of the key inputs to any valuation exercise. Third, valuation skills can improve your ability to communicate and bargain with those who hold the purse strings of the company. Finally, (upward) career mobility demands a breadth of knowledge and valuation skills are arguably one of the most important because it is the value implications of decisions that ultimately matter for the owners of the firm.

Q. How is the class structured?

There are some lectures, but the class is more about class presentations and case studies as well as a great deal of discussion of current events. We talk about what is happening right now as it relates to finance and valuation. For example, I might walk in one day and start discussing Dell, which was recently undergoing a leveraged buyout. We’ll talk about the relevant issues, value the company, and compare it to the proposals being offered by competing stakeholders. We also discuss students’ companies. For example, last year I had executives from Johnson & Johnson and IBM in my course. So we pulled up the most recent SEC filings and market data for these companies and set about valuing them. Ultimately, the course is hands-on and engaging – learning by doing.

Q. What do you enjoy most about teaching executive MBA students?

They are the perfect mixture of motivated, academically curious and mature students with sufficient work experience to appreciate the nuances of what we discuss in class.

Q. What do you like about teaching at Wharton | San Francisco?

The focus in San Francisco naturally tends toward tech and smaller startup companies. So we talk about the challenges they face that pertain to finance and valuations, like a short performance record and few comparable companies. We can quickly apply what we’re learning about in the broad sense to the specific nature of students’ companies and own situations.

Q. What do you want EMBA students to take away from your class?

I want them to have an appreciation that valuation permeates all aspects of a company and not just finance. I want them to have a strong grasp of the principles that we study to help them in their careers no matter in which functional area they choose to work.