21/09/2012 07:22 BST | Updated 20/11/2012 05:12 GMT

New Directions for Business School Corporate Finance

Scholarly appreciation of business and management needs to react quickly to changes in the commercial environment. The pace of change has been particularly rapid in financial markets and institutions, creating the need for a shakeup in business school corporate finance teaching. Business school students should investigate financial instability fully, rather than treating it as a marginal problem, and they should debate the causes of the financial crisis. Currently, textbooks on corporate finance ignore the problem. The global nature of money needs to emphasised, and the problems this poses for regulators explored. Money fulfils the role of 'means of exchange' and 'store of value,' but the rapidly emerging global investor is more concerned with the later than the former.

Finance scholarship must not get too specialised and technical. Financial knowledge should be accessible to all managers and knowledge workers because they are decisions makers. Finance must not be an isolated technical specialism for maths and computer geeks. Equally, finance should not detach from accounting because investors providing finance for businesses need accounting information to monitor profits. Investors are not the only people that need accounting, managers do as well, but they are the most powerful and important users of accounting. Statistics and econometrics are rigorous and power full tools, but they can be enhanced by introducing a qualitative dimension, e.g., corporate governance, business ethics, fraud etc.

We need to understand the role finance plays in society and the links between politics and finance. Governments have had to step in to rescue the financial system and we need to understand why. In short, corporate finance must be more global, commercial and political and debate the problems of finance. The boundaries of the subject need to be expanded to incorporate a more macro-economic and sociological perspective.

What is the best way of achieving this? Keynes' ideas were gradually assimilated back into the mainstream and did not break decisively with the neo-classical economics. He adopted Irving Fisher's idea of the 'time value of money' which has become the foundation of modern finance theory. In financial matters, Keynes is a conservative rather than a radical.

The political economy approach is inherently global, political and commercial, providing a good foundation for developing corporate finance. It represents a radical break from the economic mainstream and provides a basis for challenging ideas like 'time value of money' (TVM). The key point in political economy of finance is seeing investors as a group, rather than individuals, and interpreting the financial services industry as a tight knit cluster of activities that serve investors and monitor managers.

Political economy has a stronger grip on value than modern economics because company costs and profits are part of the value process. The economists' approach to value is restricted to the consumers' subjective appreciation, ignoring the company perspective. Commodities are produced before being consumed, and the company's primary motivation is profit. The value of every commodity is a balance between the consumers' perceptions and the company's profit.

The fact that economists treat value as a subjective consumer concept weakens their theories of business and finance. The TVM, for example, may work as a consumer concept, but its applicability to business decision making will be limited. The economists' concept of the 'cost of capital' is also a weak one. Capital is not a cost, as any accountant will testify. The idea that dividends are a cost is an absurdity. The political economy perspective uses the 'circuit of capital' model (Accounting for Business Studies, Elsevier 2003) to understand the businesses process. This reveals that the length of the 'working capital cycle' and the 'working capital' ratio are key indicators of risk. The economists' approach to risk is based on the standard deviation of share price, but this measure is detached from the business process. Again, the economists' theory of finance is not a business theory but an artificially restricted consumer one.

The problems of finance are among the biggest problems of our time and political economy provides a framework that is big enough and broad enough to put the problem in a logical framework. This is the way forward for business school corporate finance.