Lintner, through a serious of interesting events both in his own life and the world around him, eventually built a bridge between the economics and business departments of Harvard, which had until that point been fairly separate and autonomous entities.
During his time there, Lintner worked on quantifying the decision-making process of internal firm investment. Typical thinking dictated that a firm should continue to invest as long as the marginal return on that investment was greater than the cost of capital.
However, Lintner found that there was not adequate thought given to the riskiness and the potential rewards for a riskier investment. The question of risk again becomes extremely important.
B for Bubba - read your first sentence.
ReplyDeleteIt wasn't clear at the time (or until the end of this chapter), that Treynor approached the problem from the investor side, while Lintner approached it from the view of financial managers inside the firm. Black was learning from both of them.
What Lintner was concerned with was that smaller firms were more dynamic, and probably better investments. But, larger firms generated more cash flow which could be leveraged into more external funding. How could you better predict rates of return so that the increasingly important institutional investors could direct their money properly?