Reality check in the classroom

PUBLISHED : Thursday, 10 November, 2011, 12:00am
UPDATED : Thursday, 10 November, 2011, 12:00am


As major tremors continue to shake the world's financial markets at alarmingly regular intervals, Professor Vidhan Goyal has no shortage of up-to-the-minute case studies to discuss with his MBA students at HKUST Business School.

'One thing we talk about these days is the role of uncertainty - how it affects future government policy, stock markets and company investment in new projects,' he says. 'You can see now how it destroys value when organisations are unwilling to invest and individuals are worried about jobs.'

To resolve the current crisis, governments should take further bold steps and give clear policy direction, Goyal adds. In the short-term, that means recapitalising European banks. In the medium-term, he believes it will also be essential to enact measures to promote growth rather than austerity, boost investment in technology and human capital, and make tax regimes more equitable.

'To explore and develop these points in the classroom, we draw lessons from current reports and newspaper articles to make things more relevant,' says Goyal, who teaches two courses in the MBA programme.

One course looks at the basics of corporate finance, covering topics such as funding needs, capital budgets and firms' investment decisions. The other zeroes in on the intricacies of strategic finance and value creation, dealing with areas such as mergers and acquisitions, private equity transactions, where to find synergies, and restructuring assets and liabilities.

'The courses may use some of today's examples, but they are not built around current events,' Goyal explains. 'Our approach is to introduce situations that are logical, along with major concepts and structures that students can take into the real world. We concentrate on the overarching lessons - for example, problems high leverage can create for governments and firms, not the nitty-gritty of one-off deals.'

Reflecting the times, particular attention in the classroom is also given to aspects of moral hazard. This can lead to discussion of pay and incentive in large banks and finance houses, as well as issues linked to levels of risk taking in certain parts of the banking sector.

What everyone can agree on is the importance of having the right measures in place for incentives and effective corporate regulation. Typically, classroom opinions continue to vary on what represents fair reward for executive performance and what rules should bind various levels of management.

That is something Goyal expects and, indeed, encourages.

'Students are trying to understand what is happening in the world of business and how it will affect their future job prospects,' he says. 'Therefore, they want us to bring the real world into the classroom. And when things are changing so fast, our job as faculty is to explain not just what is happening, but why.'

A vital part of this is to highlight the impact that ethics and public perceptions have on the valuation of corporations and other entities.

'The key is for companies to promote the view that it is safe to enter into contracts with them,' Goyal says. 'In this context, we show how valuations fall when investors see companies have not been acting ethically.'