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The Book of Con: Corporate Finance (Finance d’Entreprise) by Vernimmen, Quiry, Le Fur, Dallocchio, and Salvi

Manufacturing Financial Idiocy

Corporate Finance book: The Book of Con

* A satire is made based on this article. You can find it here.

This article serves as an example and reminder that people and students always have to maintain their critical thinking even though the book is written by some acclaimed professors in Europe and used widely in French universities and business schools. I also hope that this article highlights the depth of indoctrination in our education system and how our academia has been deeply corrupted by corporations, banking lobbyists, and think tanks. 

This article will review a part of the “Corporate Finance – Theory and Practice” book that I have on hand, published by John Wiley & Sons, 2008 edition. It didn’t dawn on me until a year ago that actually the answer was already in the title. The title already gave the key to unlock the truth, it is called Corporate Finance, so the book is written for the profit of corporations/companies and not to teach finance to students and the general public. 

The authors of the books are (I’m just going to type all that is written on the page of ‘About the authors’ on its 5th edition, December 2017) to give you an idea of who they are:

  1. Pascal Quiry holds the BNP Paribas Chair in Finance at HEC Paris and he is a founder of an investment fund which specialises in investing in start-ups and unlisted SMEs. He is a former managing director in the M&A division of BNP Paribas where he was in charge of deals execution.
  1. Maurizio Dallocchio is Bocconi University Professor of Corporate Finance and Past Dean of SDA Bocconi School of Management. He is also a board member of international and Italian institutions and is one of the most distinguished Italian authorities in finance.
  1. Yann Le Fur is an Affiliated Professor at HEC Paris Business School and a senior banker for Natixis after working as an investment banker for a number of years, notably with Schroders, Citi and Mediobanca and as an M&A director for Alstom.
  1. Antonio Salvi is Dean of the Faculty of Economics at LUM Jean Monnet University and Senior Professor of Finance at SDA Bocconi School of Management.

5.  Pierre Vernimmen, who died in 1996, was both an M&A dealmaker (he advised Louis Vuitton on its merger with Moet Hennessy to create LVMH, the world luxury goods leader) and a finance teacher at HEC Paris. His book Finance d’Enterprise was, and still is, the top-selling financial textbook in French-speaking countries and is the forebear of Corporate Finance: Theory and Practice.

This article piece will specifically discuss Chapter 38 of the Corporate Finance (Finance d’enterprise) book, 2008 edition titled Returning Cash to Shareholders: Dividend Policies. My overall impression of this chapter is that the explanation is too wordy, it was made complicated to explain something that is supposed to be simple. As result it was a nightmare to read, it wasted my time and I don’t think I gain any valuable information or knowledge from reading the book. Instead, it left me with some confusions which I think were purposely intended. 

The first part of this article will debunk Chapter 38 and the second part will discuss the role of universities and professors as propagandist and indoctrination arm of the ruling oligarchs who own corporations and banks. 

Corporate Finance Theory & Practice by Vernimmen, Quiry, Dallocchio. Le Fur, Salvi.
Corporate Finance: Theory & Practice, 5th Edition. Authors: Vernimmen, Quiry, Dallocchio, and Salvi. Screenshot taken from Amazon site.

First Part: Debunking Corporate Finance book Chapter 38 “Returning Cash to Shareholders: Dividend Policies”

On the first page of the chapter which is page 768, it is stated that payment of a dividend has no impact on the shareholder’s wealth when the market is in equilibrium.

“In markets in equilibrium, payment of a dividend has no impact on the shareholder’s wealth, and the shareholder is indifferent about receiving a dividend of €1 or a capital gain of €1.”

“At equilibrium, by definition, the company is earning its cost of equity.”

I’m not an economist, not even a finance professor, and not interested to be one, but what equilibrium market has anything to do with the payment of dividend not enriching shareholder? 

Based on Wikipedia the definition of economic equilibrium is: “economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. For example, in the standard text perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal.[1] Market equilibrium in this case is a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes, and quantity is called the “competitive quantity” or market clearing quantity.”

According to Investopedia: “Equilibrium is the state in which market supply and demand balance each other, and as a result prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand—while an under-supply or shortage causes prices to go up resulting in less demand. The balancing effect of supply and demand results in a state of equilibrium.”

Understanding the meaning of Market Equilibrium, I don’t see a valid correlation between the market in equilibrium with the payment of dividend not enriching shareholder. If you take the theory of Equilibrium market further, introducing the views of Adam Smith, the father of Free Market also known as capitalism, for market to be in equilibrium, the market has to be free. In our real world, there is no such thing as a free market. You can not have a free market when there is monopoly or oligopoly. Our market is not free when our monetary system is owned and controlled by a few very powerful elites. There is no free market when there is no democracy. The free market is an ideal that only lives in a dream world or fiction for the moment. Free market has become a myth as in general it is human nature to be selfish and greedy, hence humankind tends to manipulate in order to gain wealth and power.  

Further on the next page of the book, on page 769, emphasized on blue colored font: “In markets in equilibrium, there are not good or bad dividend policies.”

It is evident that the authors of this ‘Corporate Finance (Finance d’enterprise)’ book is trying hard to embed this idea into the students’ and readers’ minds, but one that is founded on an argument fallacy (there is no relationship between market in equilibrium and dividend not enriching shareholder) and one that is based on ideal (or even myth) of the existence of a free market. To name the book as “Corporate Finance – Theory and Practice” is not only ignorant but also dishonest as the authors don’t really apply the practice in supporting their arguments as in reality there is no such thing as a free market.

I would also like to add the additional explanation that was included in the Vernimmen Letter, letter number 39 of February 2009, that was also used as part of the HEC Paris MBA course manual of “The Financial Dimension of Strategic Decisions” class where one of the authors of ‘Corporate Finance’ book, Pascal Quiry was the professor. The ‘Corporate Finance’ book was used as the main textbook of this “The Financial Dimension of Strategic Decisions” class.  

Vernimmen Letter No.39 February 2009 on Dividend.

In the aforementioned Vernimmen Letter, on the second point, it stated:

“Contrary to the wages, the payment of which enriches the employees, the payment of a dividend does not make the shareholders richer since the value of the share drops by the amount of the dividend. If this were any different, all firms would have started paying dividends long ago and poverty would have been eradicated from this world. When a firm pays a dividend to a shareholder, the latter merely gets a part of his wealth back in cash. Pretending that shareholders have to tighten their belts just because the employees do the same may be politically fair but economically untrue. When the first earns a living, the other turns a part of his wealth into cash.”

The argument that is used to support the statement that dividend payment doesn’t enrich the shareholder since the value of the share drops by the amount of dividend is misleading and deceitful. 

On page 769, a chart of the share price of “Legris Industrie” was shown where the share price of the company fell by €19 almost immediately after the dividend payment of €19 on September 2001. It is true that share price tends to drop after dividend payment, but it doesn’t mean that payment of dividend doesn’t enrich the shareholder, otherwise why would dividend be included as part of the calculation of ROI (Return on Investment) for investor? Nobody would invest or buy stock if there is no hope for extra income or profit in the form of dividend or capital gain. 

The argument that since share price drops after dividend payment thus shareholder who receives dividend does not get richer is deceptive. A dividend is still income for shareholder and fluctuating share price is not part of the picture of the shareholder’s wealth until the time when the shareholder sells his/her share. Usually, share prices tend to drop after dividend payment because potential investors who want to buy stocks just miss the dividend payment, so they are reluctant to buy the share at ‘normal’ price. But stocks always fluctuate and stock prices will rise again. So if the shareholder who just receives dividend payment doesn’t sell his/her share immediately after receiving dividend, he/she just get enriched by the dividend payment. 

“If this were any different, all firms would have started paying dividends long ago and poverty would have been eradicated from this world. When a firm pays a dividend to a shareholder, the latter merely gets a part of his wealth back in cash. Pretending that shareholders have to tighten their belts just because the employees do the same may be politically fair but economically untrue. When the first earns a living, the other turns a part of his wealth into cash.”

I think whoever wrote the excerpt above must think that it is a genius argument but instead proving himself or themselves as ludicrous. How could poverty be eradicated by paying dividends when it is mostly the super-rich who own stocks? How can inequality be minimized when it is the stock market, dividend payment, and share buy-back are actually the reasons for the widened gap in inequality as they extract wealth from the bottom for the top 1%? The stock market, dividend payment, and share buy-back are easily manipulated and used to exploit the people for the trickle-up economy where the rich basically rob the poor (the reverse of Robin Hood).

And then adding the argument that shareholders are still entitled to dividends even though the employees “tighten their belts” and that it is economically untrue, is just adding insult to the injury of the general public. I find that the excerpt above not only shows the utmost level of arrogance and idiocy but also political and economical ignorance of the well-regarded professors from prestigious universities such as HEC Paris, hailed by the Financial Times as one of the best universities in Europe. 

Chapter 38 page 769 also using the Miller-Modigliani approach to back up the argument that paying out more or less dividend will have no effect on shareholder’s wealth. This is using the wrong theory or rather oversimplification to back up an argument as the Modigliani – Miller theorem has many constraints put in the theory, such as the absence of taxes, bankruptcy costs, agency costs, and asymmetric information. To explain further, the Modigliani-Miller theorem only works in an efficient market where asymmetric information is absent. In reality, there is asymmetric information thus our market is not efficient, hence Modigliani-Miller approach should not be used to explain that dividend does not affect shareholder’s wealth. Herein the title of the book “Theory and Practice” just contradicts itself as the theory can’t be used to explain the practice or reality. 

The rest of Chapter 38 tries to give information surrounding dividend and differential tax treatments between dividend and share buy-back from the point of view as investor and company, but failed terribly as there are so many contradicting sentences that leave the reader at the end even more confused than before. One might even assume that the book is deliberately trying to confuse readers and not even trying to give knowledge.

After reading Chapter 38 meticulously, I find that this “Corporate Finance” book that has received some rave reviews from prominent bankers, CEOs, CFOs, finance professionals, professors of prestigious universities is nothing but a politicized propaganda book with the aims to indoctrinate, dumb down, and manufacture stupidity. It is worrisome to see many glorious reviews coming from prominent business people and leaders, either they don’t really understand Corporate Finance or they are morally corrupt. 

Rave Reviews from Business Leaders, CEOs, CFOs & Finance Professionals
Rave Reviews from Business Leaders, CEOs, CFOs & Finance Professionals of the Corporate Finance Book Fifth Edition.

What is more terrifying is the fact that for 27 years since its first original French publication by Éditions Dalloz in 1994 and for 14 years since the first English publication by John Wiley & Sons, that no one, not a single professor or a finance professional had ever dare to challenge or even to criticize the book. Are they afraid or complicit in this depraved system?

This book and its authors represent the quality of education on the subject of finance in some of the top universities in the world. It also helps clarify some of the economic problems such as the widened wealth gap arising from the rabid financial capitalism of our world. To fix the overall system or even to build it from scratch all over again we also need to look thoroughly at our education system and learn from its mistakes. 

Second Part: Professors and Universities as Indoctrination Arm of the Oligarchs

The views of Pascal Quiry, one of the most acclaimed professors in France because of the Corporate Finance book he co-authored with Vernimmen are promoted by the education institution he currently works which is HEC Paris. HEC Paris is perceived as the best business school (ecole de commerce) in France where most of the French elites go and it also claimed to be one of the best in the world through its rankings in the Financial Times and The Economist, to mention a few.

HEC Paris promoting Pascal Quiry's idea that dividend doesn't enrich shareholder
"3 IDÉES À RETENIR SUR LES DIVIDENDES AVEC PASCAL QUIRY" (Pascal Quiry's 3 Ideas on Dividends), taken from HEC Paris' website, article dated 27 June 2018.
Pascal Quiry in Les Echos: "It's a wrong idea that dividends enrich shareholder"
Pascal Quiry: "It's a false idea that dividends enrich shareholder"

Pascal Quiry seems to be the French mainstream media’s darling too such as “Les Echos” in regards to dividend or pushing ideas that benefit the ruling elites. He sometimes appears on mainstream French TV such as BFMTV to pedal propaganda that benefits the French oligarchs. Les Echos is one of the several media owned by Bernard Arnault, one of the world’s richest billionaires who also own LVMH. Whilst BFMTV is owned by Patrick Drahi, another French billionaire and oligarch. This makes one question whether Pascal Quiry is on the French oligarchs’ payroll as their mouthpiece? While the university he works for HEC Paris is indeed in partnership with banks and corporations owned by the French and world’s oligarchs which I already exposed in my essay here.

HEC Paris Corporation Partners
HEC Paris' Partnership with Banks and Corporations.

There is no doubt as more and more evidence comes out that educational institutions such as HEC Paris and professors such as Pascal Quiry, along with the mainstream media are the propaganda mouthpiece and indoctrination arm of the ruling elites with the objective of controlling the mind of the general population by manufacturing stupidity and ignorance. They have shown unscrupulousness as educators where corruption and moral depravity entrenched at the core and deepest level of the French education system. It won’t be long before we witness the decline of West civilization such as France as the broken system in politics, economics, and education is leading the path of destruction and decadence of France, the second puissance country in the EU (European Union) behind Germany and the sixth most powerful country in the world. It will be once again a sad and repeated story of the fall of an empire that history has taught us over and over again. 

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