Crafting Contemporary Corporate Finance - Adapting Adam Smith's Concepts for the 21st Century
In a nutshell, Donald H Chew argues that the last four decades have seen corporate finance emerge as a global success story right up there with medical and information technology advancements. He makes this case in The Making of Modern Corporate Finance, where he updates Adam Smith's ideas for the 21st century.
Chew takes a hard look at the "old-school" corporate finance of the 70s that had businesses like General Mills manipulating their portfolios into all-weather growth companies. CEOs dabbled in everything from Play-Doh makers to submarine manufacturers, and as long as their earnings grew, they kept their jobs despite questionable investment practices.
When the S&P 500 lost nearly half its value, two professors at Rochester University questioned the very survival of corporations. That set the stage for the 80s, where a group of financial wizards, the so-called Magnificent Seven, would revolutionize American corporate finance.
Chew names Merton Miller, a professor at Carnegie-Mellon university, as the pioneer of this revolution in a classroom session in 1957. Miller's mission was to turn corporate finance from a haphazard decision-making process into a structured theory of investments and capital management.
What followed were waves of hostile takeovers, share buybacks, replacing equity with debt, and companies going private. Today, the number of US-listed companies has dropped significantly compared to the late 90s, with the Magnificent Seven contributing to a significant increase in the wealth of many Americans.
Although Chew presents complex ideas in simple language, his book's structure could be improved to better convey his main thesis. Instead, it ends with an essay on the benefits of ESG, which feels outdated in the era of Trumpian economics.
The essays in the book raise interesting questions. Is modern corporate finance giving way to postmodern finance? The Magnificent Seven are extremely simple from a corporate finance perspective, not relying on complex financial engineering to create their value.
Another thought-provoking question: is there anything truly novel in corporate finance? History shows that major innovations, like railroads, electrification, the internet, and AI, have driven surges in productivity and fueled stock market bubbles. The technology sector comprised 37% of America's market capitalization in early 2025, but railroads accounted for 63% in 1900. The dotcom crash taught us that bubbles can – and do – burst, but the underlying technologies continue to shape our world.
Private equity plays a significant role in the period of corporate finance analyzed by Chew. It boomed as real interest rates plummeted from 20% in 1980 to zero by 2020, making a few bankers look like geniuses for replacing equity with cheaper debt. While the seven are now experiencing a correction, reducing their market value by roughly $2.5 trillion, their technologies are poised to continue shaping the world.
Chew's book, The Making of Modern Corporate Finance, updates Adam Smith's ideas for the 21st century, focusing on the transformation of corporate finance from the 70s to present day. In the 70s, businesses like General Mills manipulated portfolios, with CEOs making questionable investment practices. However, the Magnificent Seven, a group of financial wizards, revolutionized American corporate finance in the 80s, turning it from a haphazard process into a structured theory of investments and capital management. Their work led to waves of hostile takeovers, share buybacks, and companies going private, resulting in a significant increase in wealth for many Americans. Interestingly, Chew questions if modern corporate finance is giving way to postmodern finance, as the Magnificous Seven are minimalistic in their approach, not relying on complex financial engineering to create value. Also, Chew explores the role of private equity in this period, which boomed as real interest rates plummeted, making a few bankers look like geniuses for replacing equity with cheaper debt. Despite a correction and a drop in their market value by roughly $2.5 trillion, their technologies continue to shape the world.
