Book reviews 319

provides to practitioners, who may be with or without accounting knowledge. Hence, I

would highly recommend this book to anyone who is interested in understanding any
techniques in management accounting.

Suzana Sulaiman
Faculty of Accountancy,
Universiti Teknologi MARA (UiTM), Malaysia

doi:10.1016/j.intacc.2006.07.008

Corporate Finance—Theory and Practice, Pierre Vernimmen, Pascal Quiry,

Maurizio Dallocchio, Yann Le Fur, Antonio Salvi. Dalloz/Wiley, Paris/London
(2005). 1030 pages, $85.00, €60.00, ISBN: 2-247-06391-8

Does the world need another corporate finance book? This one, at least, is different. In
great contrast with such leading texts as Ross, Westerfield, and Jaffe (2004) or Brealey,
Myers, and Allen (2005), Corporate Finance—Theory and Practice puts financial
statement analysis at the core of the exposition. In this, the book sticks to the tradition of the
French corporate finance manual written by Pierre Vernimmen in the 1970s, of which it is
an offspring. The first of the four sections is entirely about financial statement analysis. The
rest of the structure follows standard texts, with an exposition of net present value theory,
risk, and corporate financial policies. Two other distinctive features of the book are its
emphasis on institutional details, and its European focus (two of the authors work in a
French bank, and the other two teach in an Italian business school).
For anyone who teaches corporate finance to European audiences, the promise of a text
that highlights some of the institutional background is welcome. And recent accounting
scandals have underscored that accounting is at the core of financial practice.
Is the promise fulfilled? The answer is mixed. The authors' decision to start out with
financial statement analysis has some pedagogical costs. For example, I am uncomfortable
with the fact that the first discussion of the time value of money occurs in chapter 16. In my
teaching experience, starting with general principles and working down to the details of free
cash flow calculation works best. In the same vein, Section 1 contains normative statements
on what the right financial structure is. But how is a student to react upon discovering the
Modigliani-Miller irrelevance propositions some 20 chapters later? To some extent, these
are minor quibbles, as Section 1 could be read after the other three—but then, the book
should come with a user's manual explaining how different readers could best make use of
it (students enrolled in a course, self-study students, practitioners needing a quickly
accessible reference). Alternatively, the book structure should be altered.
More troubling is the order of presentation within the sections. For example, accruals are
first defined in chapter 7 (“How to cope with the most complex points in financial
accounts,” p. 94). It is not clear why accruals (surely not a “complex” concept) are not
defined in one of the six preceding chapters devoted to cash flows, earnings, etc. Perhaps
these quirks can be attributed to the fact that the four authors divided up the work and did
320 Book reviews

not pay sufficient attention to structure. It is to be hoped that this will be fixed in future
editions.
The theoretical parts are not the book's primary strength. The presentation of some key
concepts is downright cryptic. What is a novice to make of the following highlighted
passage (p. 444)?
The cost of capital is not the weighted average of two separate costs. The overall
riskiness of the company is represented by the cost of capital, whose two key
components are debt and equity. The costs of equity and debt are a function of the
risk of the assets, the cost of overall capital and the respective weighting of each.
None of the authors is a native English speaker, and proper editing might have helped.
But in places, the lack of clarity has nothing to do with language. It is not clear to me why
the MM II formula, which has the ratio of debt to equity as an argument, is illustrated by a
graph using the ratio of debt to total firm value as its horizontal axis (p. 663). This is sure to
cause great bewilderment for first-time students of this central concept. Sometimes, the
theoretical discussions indicate a lack of familiarity with academic finance. For example,
the capital structure discussion features a laudable attempt at reviewing recent academic
studies on the topic. But the choice of the academic studies reviewed is idiosyncratic and
does not represent the current consensus of the profession. Why spend so much time on
Ross' incentive-signaling model (1977) when it has long been rejected by the empirical
literature? Finally, some statements are simply incorrect: “According to the semi-strong
efficiency hypothesis, the abnormal return should be observable only on the day when the
information becomes public.” (p. 279). In fact, the semi-strong form of the efficient-market
hypothesis does not rule out price reactions to privately informed trades before the event (all
it rules out is underreaction or overreaction to the release of public information).
Clearly, the book's authors do not claim to be at the frontier of finance knowledge. But
even for very concrete corporate valuation issues, this apparent detachment from theory can
become problematic. Consider the computation of an unlevered beta—clearly a top-rate
concern for many practitioners. On pp. 445–446, the authors give formulas for unlevered
betas, without justification. That would be fine if there were a consensus in the profession
on this issue. In fact, as Richard Ruback's recent work (2002) makes clear, the issue is quite
a bit more complex.
Even the practice-oriented sections (the book's distinctive feature) are not always
crystal-clear. Sometimes it is hard for the reader (or at least me) to figure out whether a
sentence is a prescription or a description. For example, on p. 815 the authors state a
“principle” according to which “when control of a listed company changes hands, minority
shareholders receive the same premium as that paid to the majority shareholder.” It is hard
to infer from the surrounding discussion whether this principle (i) is an accurate description
of the empirical reality, (ii) is an accurate description of the legal principles governing such
transactions in European economies, or (iii) is just a principle that some market participants
think is desirable.
Given the announced emphasis on practice and the volume taken up by financial
statement analysis in the book, I would have expected in-depth discussions of creative
accounting—perhaps a case study. But the book only offers a few passing mentions and a
table listing dubious practices, without real discussion.
 Book reviews 321

One of the book's targets are practitioners, who will not have the time to read it from
cover to cover and will use it as a reference. How useful are they likely to find this book? In
my view, Section 1 on financial analysis is the book's main strength, and its emphasis on
practice will appeal to practitioners. It offers a nice complement to the classic corporate
finance texts. The book comes with an accompanying website and a newsletter, both of
which are useful. It remains in need of a better index: the index entry on “behavioral
finance” picks up a discussion of behavioral studies for cash management.
This book is clearly different from the well-established corporate-finance texts. It is
unlikely to displace them. The discussion of financial statement analysis will come as a
useful complement. For the rest of finance, most readers will be better served by existing
textbooks.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2005). Principles of corporate finance (8th ed.). McGraw-Hill/Irwin.
Ross, S. A. (1977). The determination of capital structure: Incentive signalling approach. Bell Journal of
Economics, 8(1), 23−40.
Ross, S. A., Westerfield, W. W., & Jaffe, J. (2004). Corporate finance (7th ed.). McGraw-Hill/Irwin.
Ruback, R. (2002). Capital cash flows: A simple approach to valuing risky cash flows. Financial Management, 31
(2), 85−103.

François Degeorge
Swiss Finance Institute, University of Lugano, Switzerland
E-mail address: [email protected].

doi:10.1016/j.intacc.2006.07.006

Ethics, Governance and Accountability: A Professional Perspective, S. Dellaportas,

K. Gibson, R. Alagiah, M. Hutchinson, P. Leung, D. Van Homrigh. John Wiley and
Sons Australia, Milton (Qld) (2005). 363 pp., £27.95 / €46.20, ISBN: 0-470-80499-8

This textbook emphasizes that ethics need to be an essential feature if a firm is to achieve
a sound business environment and long-run accountability. It builds on two main
observations. First, lapses in ethical behavior seem to have caused many of the high-profile
corporate collapses and financial scandals; second, even apparently good governance
systems have been unable to prevent such scandals. Accounting professionals find
themselves at the heart of this ethics crisis, which seriously deteriorates the public trust.
The book advocates the necessary reinforcement of ethics in accounting education. It
generally addresses students from graduate (or upper undergraduate) programs in
commerce and business administration, and more specifically students in a professional
accounting program. References and practical illustrations are mainly related to Australian
and U.S.A. settings. The approach is practitioner-oriented, combining concise presentations
of theories, concepts, or frameworks, along with practical experiences and cases. Each
chapter announces learning objectives and ends with a summary, key terms, understanding
questions, and a practical case study. The textbook is structured in two parts. Part 1