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ONLINE FOOTNOTES

Readers wishing to drill down on the concepts in the book may wish to peruse select books and articles listed in the footnotes. We have compiled this online bibliography with links for readers who want to download or purchase these books and articles online.

Please note that some online articles--including those in the Harvard Business Review and the Wall Street Journal--may require payment for access. Also, for those publications that do not publish articles online, we provide links to pages that describe how to subscribe or order back issues, where possible.

 

Chapter 1

1. Louis E. Boone, Quotable Business (New York: Random House, 1999).

3. Charles D. Ellis, Winning the Loser's Game, Third edition (New York: McGraw Hill, 1998) p. 5.

4. "Where, Oh Where Are the .400 Hitters of Yesteryear," Financial Analysts Journal, November-December 1998, pp. 6-14.

5. Common Sense on Mutual Funds (New York: John Wiley & Sons, 1999) p. 92.

6. Yet another cost is less obvious. As the size of their fund increases, portfolio managers incur market impact costs. Market impact is the difference between an execution price and the posted price for a stock. For large volume purchases or sales, the market impact may make the transaction not economically feasible. Therefore, a manager may have to hold stocks he no longer wants, which prevents him or her from buying stocks he or she does want to own. For further discussion, see Ben Warwick, Searching for Alpha (New York: John Wiley & Sons, 2000), pp. 36-38.

8. Jack L. Treynor, "Long-Term Investing," Financial Analysts Journal, May-June 1976, p. 56.

9. John Burr Williams, The Theory of Investment Value (Cambridge: Harvard University Press, 1938), pp. 186-91.

11. Jonathan Clements, "Vanguard Founder Blasts Funds' Focus," Wall Street Journal, May 16, 2000, p. C1.

12. Alfred Rappaport, "CFOs and Strategists: Forging a Common Framework," Harvard Business Review, May-June 1992, p. 87.

13. Michael J. Mauboussin, Alexander Schay and Stephen Kawaja, "Counting What Counts", Credit Suisse First Boston Equity Research, February 2, 2000.

Chapter 2

3. "Investing Wisely in an Era of Greed," Fortune, October 2, 2000, p. 130.

10. For a detailed discussion of dividend models and expected returns, see Bradford Cornell, The Equity Risk Premium (New York: John Wiley & Sons, 1999) Chapter 3.

Chapter 3

1. "The Power of Smart Pricing," Business Week, April 10, 2000, p. 160.

2. Adrian Slywotzky and Joao Baptista, "AT&T Finds Bigger Isn't Always Better," Wall Street Journal. October 27, 2000, p. A18.

3. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: The Free Press, 1985) p. 73.

5. David Besanko, David Dranove and Mark Shanley, Economics of Strategy (New York: John Wiley & Sons, 2000) p. 436.

6. General Electric 1999 Annual Report, p. 5.

7. For a detailed look at how companies can sensibly reduce their capital expenditures, see Tom Copeland, "Cutting Costs Without Drawing Blood," Harvard Business Review (September-October 2000), p. 155. According to Copeland's research, a permanent 15% cut in capital spending could increase the market capitalization of some companies by as much as 30%.

8. Emily Nelson, "Wal-Mart Sets Supply Plan as Net Tops Forecasts," Wall Street Journal, November 10, 1999, B12.

10. Threshold margin first appeared in Alfred Rappaport, "Selecting Strategies That Create Shareholder Value," Harvard Business Review (May-June 1981), pp. 139-49.

Chapter 4

1. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press, 1980).

2. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: The Free Press, 1985) p. 36.

3. Adrian J. Slywotzky, Value Migration: How to Think Several Moves Ahead of the Competition (Boston: Harvard Business School Press, 1996); Adrian J. Slywotzky and David J. Morrison, The Profit Zone: How Strategic Business Design Will Lead You To Tomorrow's Profits (New York: Times Business, 1997).

4. Clayton M. Christensen and Matt Verlinden, "Disruption, Disintegration, and the Dissipation of Differentiability," Harvard Business School Working Paper, 2000.

5. Philip Evans and Thomas S. Wurster, Blown to Bits: How the New Economics of Information Transforms Strategy (Boston: Harvard Business School Press, 2000).

6. Adrian J. Slywotzky, David J. Morrison, Ted Moser, Kevin A. Mundt and James A. Quella, Profit Patterns: 30 Ways to Anticipate and Profit From Strategic Forces Reshaping Your Business, (New York: Times Books, 1999), p. 123.

7. Ibid. pp. 39-43.

8. Clayton M. Christensen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997).

9. Ibid, p. 32.

10. Andrew S. Grove, Only the Paranoid Survive (New York: Currency/Doubleday, 1996).

11. Clayton M. Christensen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997).

12. Adrian J. Slywotzky; Clayton M. Christensen and Richard S. Tedlow; and Nicholad G. Carr, "The Future of Commerce," Harvard Business Review (January-February 2000).

13. Michael Schrage, "Getting Beyond the Innovation Fetish," Fortune, November 13, 2000, pp. 225-32.

14. Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard Business School Press, 1999).

15. Ibid.

16. W. Brian Arthur, "Increasing Returns and the New World of Business," Harvard Business Review (July-August 1996).

17. Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard Business School Press, 1999), p. 117.

18. "Stern-Stewart EVA Roundtable," Journal of Applied Corporate Finance (Summer 1994).

19. Adam M. Brandenburger and Barry J. Nalebuff, Co-opetition: 1. A revolutionary mindset that combines competition and cooperation. 2. The Game Theory Strategy that's changing the game of business. (New York: Doubleday, 1996).

Chapter 5

2. Alfred Rappaport, "Stock Market Signals to Managers," Harvard Business Review (November-December 1987), pp. 57-62.

3. Chris Kenney, "Market Signals Analysis: A Vital Tool for Managing Market Expectations," L.E.K. Shareholder Value Added Newsletter, Volume 9.

4. Aswath Damodaran's web site offers a full cost of capital discussion and many complementary tools. See http://www.stern.nyu.edu/~adamodar

5. Market-implied forecast period was introduced under the name "value growth duration" in Alfred Rappaport, Creating Shareholder Value: The New Standard for Business Performance (New York: Free Press, 1986). [Note: the link refers to the revised edition of this book.]

6. For a detailed discussion of the role of market-implied forecast period in security analysis, see Michael Mauboussin and Paul Johnson, "Competitive Advantage Period: The Neglected Value Driver," Financial Management, Summer 1997, pp. 67-74. The authors call the forecast period the "competitive advantage period." [Note: the link refers to the original article, which was published as a CSFB Equity Research Report.]

7. In a vast majority of cases, as long as the number and exercise price of options are fixed in advance, their cost never hits the income statement. However, the cost of options is reflected on the income statement under two conditions. The first is if a company choose a program with a variable option strike price. For example, a company can tie changes in its option strike price to an index. In this case, the company records annual changes in the option's intrinsic value (stock price minus exercise price plus time value) on its income statement. The second is when a company "reprices" its options, or lowers the strike price. Repricings trigger a change in treatment from a "fixed" to a "Variable" program, which affects the income statement. For more on indexed options, see Alfred Rappaport, "New Thinking on How to Link Executive Pay with Performance," Harvard Business Review, March-April 1999.

8. Brian J. Hall, "What You Need to Know About Stock Options," Harvard Business Review, March-April 2000, p. 123.

10. For an excellent reference for options pricing models, see: John C. Hull, Options, Futures, and Other Derivatives (New York: Prentice Hall, 1999).

11. Brian J. Hall and Kevin J. Murphy, "Stock Options for Undiversified Executives," Harvard Business School Working Paper, October 2000; Nalin Kulatilaka and Alan J. Marcus, "Valuing Employee Stock Options," Financial Analysts Journal (November-December 1994); Jennifer N. Carpenter, "The Exercise and Valuation of Executive Stock Options," Journal of Financial Economics (1998); and Lisa Meulbrook, "The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options," Harvard Business School Working Paper (2000).

12. In the company's 2000 annual report, Microsoft states that options "generally vest over four and one-half years ... while certain options vest ... over seven and one-half years." We have assumed five years as an average.

Chapter 6

1. Thomas H. Nodine, "Home Depot's Leading Indicators of Value," sidebar in Alfred Rappaport, "New Thinking on How to Link Executive Pay with Performance," Harvard Business Review, March-April 1999.

2. J. Edward Russo and Paul J. H. Schoemaker, "Managing Overconfidence," Sloan Management Review (Winter 1992).

3. Hersh Shefrin, Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Boston: Harvard Business School Press, 2000), p. 20.

8. Jim Davis and Michael Kanellos, "AOL, Gateway in far-ranging pact," CNET News.com (October 20, 1999).

Chapter 7

1. Max H. Bazerman, Judgment in Managerial Decision Making, (New York: John Wiley & Sons, Inc, 1998), pp. 6-8, 39-41.

4. Richard H. Thaler, "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, 4:1 (Winter 1990), 193-205.

5. Hersh Shefrin, Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Boston: Harvard Business School Press, 2000), pp. 214-18.

6. Daniel Kahneman and Amos Tverksy, "Prospect Theory: An Analysis of Decision Under Risk," Econometrica, 47: 263-291 (1979).

7. Terrance Odean, "Are Investors Reluctant to Realize Their Losses?" Journal of Finance 53 (October 1998), 1775-1798.

9. Brad Barber and Terrance Odean, "Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, 55: 2, (April 2000), 773-806).

Chapter 8

2. Readers who want to learn more about how to identify and value real options should consult Martha Amram and Nalin Kulatilaka, Real Options (Boston: Harvard Business SChool Press, 1999). Also, see their web site at http://www.real-options.com.

3. Nalin Kulatilaka and Alan J. Marcus, "Project Valuation Under Uncertainty: When Does DCF Fail?" Journal of Applied Corporate Finance, Fall 1992, pp. 92-100 and Amram and Kulatilaka Op. Cit.

6. Richard Brealey and Stewart C. Myers, Principles of Corporate Finance, Fifth Edition (New York: Irwin McGraw Hill, 1996), pp. AP 12-13. [Note: This link refers to the Sixth Edition of this textbook, as the Fifth Edition is no longer in print.]

9. Steven R. Grenadier, "Option Exercise Games: The Intersection of Real Options and Game Theory", Journal of Applied Corporate Finance, Summer 2000, pp. 99-107.

11. Look at the price of the option and the other four inputs. Use the valuation formula to solve for the level of implied volatility consistent with the trading price of the option. See Amram and Kulatilaka (1999) or Hull (1999) for how to estimate volatility. See http://www.ivolatility.com for current volatility estimates using these two methods.

13. Martha Amram and Nalin Kulatilaka, "Strategy and Shareholder Value Creation: The Real Options Frontier", Journal of Applied Corporate Finance, Summer 2000, pp. 15-28.

15. Alfred Rappaport, "Tips for Investing in Internet Stocks," Wall Street Journal, February 24, 2000.

17. Actually, company managers can help this process by telling a great story. See J. William Gurley, "The Great Art of Storytelling", Fortune, November 8, 1999.

18. George Soros, The Alchemy of Finance: Reading the Mind of the Market (New York: John Wiley & Sons, Inc., 1994), p. 49.

Chapter 9

1. David Sheff, "Crank It Up," Wired, August 2000.

3. Paul M. Romer, "Endogenous Technological Change," Journal of Political Economy, 1990, vol. 98, no. 5, pt. 2.

4. Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard Business School Press, 1999), p. 179.

8. For a detailed discussion of this, see Geoffrey A. Moore, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers (New York: HarperBusiness, 1991); Geoffrey Moore, Inside the Tornado: Marketing Strategies from Silicon Valley's Cutting Edge (New York: HarperBusiness, 1995); Geoffrey A. Moore, Paul Johnson and Tom Kippola, Gorilla Game: An Investor's Guide to Picking Winners in High Technology (New York: HarperBusiness, 1998).

9. Clayton M. Christen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997), p. 88.

13. Sibylle Hechtel, "Biotech's Burn Rate," Red Herring, April 2000.

14. Federal Reserve Bank of Dallas Annual Report, 1999, p. 20.

15. Home Depot Annual Report, 1999, p. 19.

16. David Besanko, David Dranove and Mark Shanley, Economics of Strategy (New York: John Wiley & Sons, 2000) p. 92.

18. Kellogg Annual Report, 1999, p. 15.

20. David Blanchard, "Flow Manufacturing Pulls Through," Evolving Enterprise (February/March 1999).

21. GE Annual Report, 1994.

23. Tom Copeland, "Cutting Costs Without Drawing Blood," Harvard Business Review (September-October 2000), p. 155-64.

Chapter 10

2. For a comprehensive treatment of the difficulty of producing synergies, see Mark L. Sirower, The Synergy Trap (New York: Free Press, 1997). 

5. The next two sections are adapted from Alfred Rappaport and Mark L. Sirower, "Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions," Harvard Business Review, November-December 1999.

6. Alfred Rappaport and Mark L. Sirower, "Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions," Harvard Business Review, November-December 1999, pp. 56-58.

Chapter 11

2. As Warren Buffett said in Berkshire Hathway's 1994 annual report: "When companies with outstanding businesses and comfortable financial positions find their shares selling far below their intrinsic values in the marketplace, no alternative can benefit shareholders as surely as repurchases."

3. Michael C. Jensen, "Corporate Control and the Politics of Finance," Journal of Applied Corporate Finance. (Summer 1991).

5. Creating Shareholder Value: The New Standard for Business Performance (New York: Free Press, 1986), p. 96. [Note: the link refers to the revised edition of this book.]

8. Clifford Stephens and Michael Welsbach, "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance 53 (February 1998).

9. William McNally, "Who Wins in Large Stock Buybacks -- Those Who Sell or Those Who Hold?" Journal of Applied Corporate Finance. (Spring 1998). McNally shows that non-tendering shareholders who "pay" for the premium to tendering shareholders through a wealth transfer are rewarded by the market's positive reaction to management's positive signal.

10. Ranjan D'Emello and Pervin K. Shroff, "Equity Undervaluation and Decisions Related to Repurchase Tender Offers: An Empirical Investigation," Journal of Finance 55 (October 2000).

11. Theo Vermaelen, "Common Stock Repurchases and Market Signaling," Journal of Financial Economics 9 (1981).

12. A Microsoft press release articulates this point: "The number of shares to be purchased during fiscal 2001 will be on several factors, primarily the level of employee stock option exercises." From "Microsoft Announces Share Repurchase Program" (August 7, 2000).

18. For a more sophisticated approach, see John R. Graham, "How Big Are the Tax Benefits of Debt?" Journal of Finance 55 (October 2000).

Chapter 12

1. This chapter is adapted from Alfred Rappaport, "New Thinking on How to Link Executive Pay with Performance," Harvard Business Review, March-April 1999, pp. 91-101.

3. Brian J. Hall, "What You Need to Know About Stock Options," Harvard Business Review, March-April 2000, p. 121-9.

5. For a detailed presentation of the incentive implications of indexed options, see Shane A. Johnson and Yisong S. Tian, "Indexed Executive Stock Options," Journal of Financial Economics, Volume 57 (2000), pp. 35-64.

7. Creating Shareholder Value: A Guide for Managers and Investors (New York: Free Press, 1998), p. 119-28.

8. For a detailed explanation of the differences between shareholder value added and residual income, see Alfred Rappaport, "New Thinking on How to Link Executive Pay with Performance," Harvard Business Review, March-April 1999, pp. 97-9.

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