In 1952, modern financial theory was born with the publication of Harry Markowitz dissertation, which developed what is referred to as the portfolio theory of investment decisionmaking, or portfolio selection, introducing a securitys risk, as well as its return, into the decisional mix Shortly after Markowitz dissertation, in two important articles published in 1958 and 1962 franco Modigliani and Merton Miller, referred to in the literature as"M& m, "developed irrelevance theories of firm capital structure and valuation launching a debate that continues to this day -The next milestone was in 1964-65, with the specification of the capital asset pricing model better known in the literature as the CAPm, a model for measuring risk, independently developed by John Lintner and william Sharpe. This was an important development because it made Markowitz's portfolio theory more tractable--one could solve for the optimal portfolio without complex computer programming --and it put the theory into an empirically testable form, which is critical for a theory's acceptability. In 1990, Markowitz, Miller and sharpe shared the Nobel prize in economics(Modigliani had won a nobel prize years earlier. With that award, we can say that finance had arrived. The relative recency of the award, indicating acceptance of finances contribution to economics, is a further reminder of how trail-blazing the Brudney and Chirelstein casebook was, in its taking an"infant "discipline as the mode of analyzing the key concerns of corporate law Jack Treynor also independently discovered the CaPm in a paper written in 1962, but that work was not recognized as such until many years after the publications by Sharpe and Lintner; even Treynor did not recognize the importance of the insight in his paper at the time it was written. See, e.g., Perry Mehrling, Fischer Black and the Revolutionary Idea of Finance 59, 73(Hoboken, NJ: John Wiley Sons, Inc. 2005)
Jack Treynor also independently discovered the CAPM in a paper written in 1962, but 7 that work was not recognized as such until many years after the publications by Sharpe and Lintner; even Treynor did not recognize the importance of the insight in his paper at the time it was written. See, e.g., Perry Mehrling, Fischer Black and the Revolutionary Idea of Finance 59, 73 (Hoboken, NJ: John Wiley & Sons, Inc. 2005). 7 - In 1952, modern financial theory was born with the publication of Harry Markowitz's dissertation, which developed what is referred to as the portfolio theory of investment decisionmaking, or portfolio selection, introducing a security’s risk, as well as its return, into the decisional mix. - Shortly after Markowitz’ dissertation, in two important articles published in 1958 and 1962, Franco Modigliani and Merton Miller, referred to in the literature as "M & M," developed irrelevance theories of firm capital structure and valuation launching a debate that continues to this day. -The next milestone was in 1964-65, with the specification of the capital asset pricing model, better known in the literature as the CAPM, a model for measuring risk, independently developed by John Lintner and William Sharpe. This was an important development because it 7 made Markowitz's portfolio theory more tractable -- one could solve for the optimal portfolio without complex computer programming -- and it put the theory into an empirically testable form, which is critical for a theory’s acceptability. In 1990, Markowitz, Miller and Sharpe shared the Nobel prize in economics (Modigliani had won a Nobel prize years earlier.) With that award, we can say that finance had arrived. The relative recency of the award, indicating acceptance of finance’s contribution to economics, is a further reminder of how trail-blazing the Brudney and Chirelstein casebook was, in its taking an “infant” discipline as the mode of analyzing the key concerns of corporate law
To return to the reason why the CaPm was an important step in the progress of finance theory, its testability, it should be noted that a major component of finance research consists of testing the accuracy of pricing models. In this regard, finance differs from many other fields in economics with its decidedly empirical focus; after all, financial economists very much want to know if by developing a new pricing model or implementing a particular trading strategy they can make money. The most important empirical finance methodology for policy purposes consists of what the literature refers to as event studies, which measure the effect of specified events" on stock prices. Event studies were developed in conjunction with testing the concept of an efficient market, the idea that market prices incorporate information; in an efficient market, abnormal profits cannot be made by trading on public information. The modern literature on efficient markets dates from an article by Paul Samuelson published in 1965 and reached a broad audience with the publication of Eugene Fama's classic survey in 1970. The first modern event studies were published by accountants in 1968 and by financial economists in 1969; this constitutes the final finance innovation of relevance to the revolution in corporate law. Event studies, which are now a large cottage industry, literally 100s having been published in nearly al finance journals, provided a methodology for testing Manne's and winters hypotheses regarding the market for control and corporate charters. In that regard their development was a In a well-known critique of the testability of the CAPM, Richard roll emphasized that the market portfolio is unobservable and hence tests are of the mean-variance efficiency of proxy and not the true market portfolio, but subsequent empirical and theoretical work has indicated that his concern is not a problem in practice. See John Y. Campbell et al, The Econometrics of Financial Markets 213-15(Princeton, NJ: Princeton Univ Press, 1997) John Campbell, Andrew Lo and Craig MacKinlay sketch the modern development of the efficient market hypothesis and the event study methodology in id at 20, 150
In a well-known critique of the testability of the CAPM, Richard Roll emphasized that 8 the market portfolio is unobservable and hence tests are of the mean-variance efficiency of a proxy and not the true market portfolio, but subsequent empirical and theoretical work has indicated that his concern is not a problem in practice. See John Y. Campbell et al., The Econometrics of Financial Markets 213-15 (Princeton, NJ: Princeton Univ. Press, 1997). John Campbell, Andrew Lo and Craig MacKinlay sketch the modern development of 9 the efficient market hypothesis and the event study methodology in id. at 20, 150. 8 To return to the reason why the CAPM was an important step in the progress of finance theory, its testability, it should be noted that a major component of finance research consists of testing the accuracy of pricing models. In this regard, finance differs from many other fields in 8 economics with its decidedly empirical focus; after all, financial economists very much want to know if by developing a new pricing model or implementing a particular trading strategy they can make money. The most important empirical finance methodology for policy purposes consists of what the literature refers to as event studies, which measure the effect of specified “events” on stock prices. Event studies were developed in conjunction with testing the concept of an efficient market, the idea that market prices incorporate information; in an efficient market, abnormal profits cannot be made by trading on public information. The modern literature on efficient markets dates from an article by Paul Samuelson published in 1965 and reached a broad audience with the publication of Eugene Fama’s classic survey in 1970. The first modern event 9 studies were published by accountants in 1968 and by financial economists in 1969; this constitutes the final finance innovation of relevance to the revolution in corporate law. Event studies, which are now a large cottage industry, literally 100s having been published in nearly all finance journals, provided a methodology for testing Manne’s and Winter’s hypotheses regarding the market for control and corporate charters. In that regard their development was as