Bridging Theory and Practice in Corporate Finance
Higher levels of sophistication and complexity are required of corporate finance today, yet managers often label academic finance tools as “too complex” or “too impractical for business to implement.” Given this apparent disconnect, explains Samir Saadi, an assistant professor of finance at the Telfer School of Management, it has become even more important for academics to translate knowledge in a way that is “actionable” for industry. “When tools from academic finance are written off as not relevant to industry, there are often missed opportunities to benefit from potentially useful innovations, because there’s a real connection between the scholarly insights, what students learn in the classroom, and the knowledge and skills finance professionals will use on the job.”
A former Visiting Scholar at Stern School of Business, New York University and Visiting Researcher at INSEAD, France, Saadi focuses his research on corporate finance topics such as mergers and acquisitions, capital budgeting, payout policy, and IPOs – as well as how these areas overlap with corporate governance and business ethics. Awarded a PhD in Finance from Queen’s University in 2012, he has taught at Queen's University, Royal Military College and University of Ontario Institute of Technology and he has also served as a consultant for several companies. His arrival at Telfer in July of this year marked a homecoming of sorts for Saadi, who completed his MBA at the school and served as a research associate.
Teaching finance classes in both the MBA and EMBA programs in the winter term Saadi will highlight how research in finance can improve practice. Speaking about the challenges of knowledge transfer, Saadi says it took decades for industry to adopt the use of “net present value” and for the technique to become routine analyzing capital budgeting projects. Newer methods of financial analysis such as real options analysis (ROA) now appear to be taking almost as long to gain acceptance among managers despite the attention they’ve received.
“Real options” refer to the opportunities that emerge after a firm initiates a project, such as the option to grow or the option to defer investment, that aren’t captured in standard financial analysis, Saadi explains. ROA can help overcome these limitations and so provide more accurate valuation. This approach “enables firms to cope with high levels of uncertainty about the upside potential or downside risk of an investment and allow for high levels of flexibility.”
It is not the design or features of the technique that prevent firms from using it but lack of knowledge. Saadi co-authored a 2011 study of management views of real options in a large sample of Canadian firms that found that only 36 of 214 respondents (16.8%) reported using them. He says the findings, which have been widely cited in finance textbooks, highlight only one area where more expertise is needed – “not only by financial analysts but also by top management.”
Saadi reminds his MBA and EMBA classes that, as with any technique, there may be valid reasons to use or not to use a real options approach in a particular case, “but when you don’t have the knowledge to routinely consider a wide array of approaches when analyzing projects, you can’t fully seize the opportunities from these choices.