FIN 395 5-Corporate Finance-Alti

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FIN 395 5-Corporate Finance-Alti

FIN 395.5 Ph.D. Corporate Finance - Spring 2008 - Aydoğan Altı

Office hours: No specific time. You can drop by anytime you like, or if you want to make

    sure I am in my office e-mail me in advance.


    - Lecture notes: I will provide these as we go along.

    - Papers: If we are discussing a specific paper in class and if I have the pdf file of it,

    I will send it to you in advance. A few old papers may not be available in pdf

    format; I suppose you can find them in the library.

    - Books: The following books are not required but are highly recommended,

    especially for those of you who are finance majors:

    o “Contract Theory” by Patrick Bolton and Mathias Dewatripont, MIT Press,


    o “The Theory of Corporate Finance” by Jean Tirole, Princeton Press, 2006

    o Financial Markets and Corporate Strategy” by Mark Grinblatt and ndSheridan Titman, McGraw Hill Irwin, 2 Edition, 2002


    - 40% final exam

    - 30% midterm exam

    - 20% homework assignments

    - 10% class participation


    Corporate financial policy: Theory

    1. Fisher Separation Theorem; Modigliani-Miller propositions; trade-off theory of

    capital structure

    2. Early agency models: Debt as a disciplining device; indirect costs of debt financing

    (risk-shifting, debt overhang)

    3. Asymmetric information: Debt signaling; signaling with inside equity; financing

    investment under asymmetric information

    4. Security design approach to capital structure

    Corporate financial policy: Empirics

    5. Financing constraints: investment-cash flow sensitivity; structural models 6. Capital structure policy: Determinants; trade-off versus pecking order; market timing 7. Capital raising and security issuance

    Further topics

    8. Financial intermediation; lending channel and supply-side effects in corporate


    9. Industry equilibrium of liquidation values and debt capacity 10. Stock market and managerial incentives: Earnings and investment manipulation

    Reading List:

    Fisher Separation Theorem; Modigliani-Miller Propositions; Trade-Off Theory of Capital


    ? Duffie, D. (1992), “Modigliani-Miller Theorem,” in Newman. P. et al. (eds), The

    New Palgrave Dictionary of Money and Finance, Vol. II, MacMillan, 715-718.

    ? Stiglitz, J. (1974), “On the Irrelevance of Corporate Financial Policy,” American

    Economic Review 66, 851-866.

    ? Miller, M.H. (1988), “The Modigliani-Miller Propositions After Thirty Years,”

    Journal of Economic Perspectives 2, 99-120.

    ? Kraus, A., and R. Litzenberger (1973), “A State-Preference Model of Optimal

    Financial Leverage,” Journal of Finance 28, 911-922.

    ? Haugen, R.A., and L.W. Senbet (1978), “The Insignificance of Bankruptcy Costs

    to the Theory of Optimal Capital Structure,” Journal of Finance 33, 383-393. ? Miller, M.H. (1977), “Debt and Taxes”, Journal of Finance 32, 261-273. ? DeAngelo, H., and R. Masulis (1980), “Optimal Capital Structure Under

    Corporate and Personal Taxation,” Journal of Financial Economics 8, 3-30. ? Graham, J.R. (2000), “How Big Are The Tax Benefits of Debt,” Journal of

    Finance 55, 1901-1941.

    ? Green, R.C., and B. Hollifield (2003), “The Personal-Tax Advantages of Equity,”

    Journal of Financial Economics 67, 175-216.

    Early agency models: Debt as a disciplining device; indirect costs of debt financing (risk-

    shifting, debt overhang)

    ? Jensen, M., and W. Meckling (1976), “Theory of the Firm: Managerial Behavior,

    Agency Costs and Ownership Structure,” Journal of Financial Economics 3, 305-


    ? Innes, R.D. (1990), “Limited Liability and Incentive Contracting with Ex-Ante

    Incentive Choices,” Journal of Economic Theory 52, 45-67.

    ? Grossman, S. and O. Hart (1982), “Corporate Financial Structure and Managerial

    Incentives,” in McCall, J. (ed), The Economics of Information and Uncertainty,

    Chicago University Press.

    ? Green, R.C., 1984, “Investment Incentives, Debt and Warrants,” Journal of

    Financial Economics 13, 115-136.

    ? Myers, S (1977), “Determinants of Corporate Borrowing,” Journal of Financial

    Economics 5, 147-175.

    ? Stulz, R. (1990), “Managerial Discretion and Optimal Financing Policies,”

    Journal of Financial Economics 26, 3-27.

? Zwiebel, J. (1996), “Dynamic Capital Structure under Managerial Entrenchment,”

    American Economic Review 86, 1197-1215.

    ? Harris, M., and A. Raviv (1992), “Financial Contracting Theory,” in Laffont J-J

    (ed.), Advances in Economic Theory, Vol. II, Cambridge University Press, 64-150.

    Asymmetric information: Debt signaling; signaling with inside equity; financing

    investment under asymmetric information

    ? Ross, S. (1977), “The Determination of Financial Structure: The Incentive-

    Signaling Approach,” Bell Journal of Economics 8, 23-40. ? Leland, H., and D. Pyle (1977), “Informational Asymmetries, Financial Structure,

    and Financial Intermediation,” Journal of Finance 32, 371-387. ? Myers, S., and N. Majluf (1984), “Corporate Financing and Investment Decisions

    When Firms Have Information That Investors Do Not Have,” Journal of

    Financial Economics 13, 187-221.

    ? Myers, S. (1984), “The Capital Structure Puzzle,” Journal of Finance 39, 572-592. ? Daniel, K., and S. Titman (1995), “Financing Investment Under Asymmetric

    Information,” in R. Jarrow et al. (eds.), Handbooks in Operations Research and

    Management Science: Finance, Elsevier Science, Ch. 23.

    ? Stein, J. (1992), “Convertible Bonds as Backdoor Equity Financing,” Journal of

    Financial Economics 32, 3-21.

    Security Design Approach to Capital Structure

    ? Townsend, R (1979), “Optimal Contracts and Competitive Markets with Costly

    State Verification,” Journal of Economic Theory 21, 265-293. ? Gale, D., and M. Hellwig (1985), “Incentive Compatible Debt Contracts: The

    One-Period Problem,” Review of Economic Studies 52, 647-63. ? Allen, F., and D. Gale (1988), “Optimal Security Design,” Review of Financial

    Studies 1, 229-264.

    ? Harris, M., and A. Raviv (1989), “The Design of Securities,” Journal of Financial

    Economics 24, 255-287.

    ? Aghion, P., and P. Bolton (1992), “An Incomplete Contracts Approach to

    Financial Contracting,” Review of Economic Studies 59, 473-494. ? Bolton, P., and D. Scharfstein (1990), “A Theory of Predation Based on Agency

    Problems in Financial Contracting,” American Economic Review 80, 93-106. ? Hart, O. (1993), “Theories of Optimal Capital Structure: A Managerial Discretion

    Perspective,” in M. Blair (ed.), The Deal Decade: What Takeovers and Leveraged

    Buyouts Mean for Corporate Governance, The Brookings Institution, 19-53.

? Hart, O. (1995), Firms, Contracts, and Financial Structure, Oxford University

    Press, Chapters 5 and 6.

    ? Hart, O., and J. Moore (1994), “A Theory of Debt Based on the Inalienability of

    Human Capital,” Quarterly Journal of Economics 109, 841-879. ? Hart, O., and J. Moore (1995), “Debt and Seniority: An Analysis of the Role of

    Hard Claims in Constraining Management, “American Economic Review 85, 567-


    ? Hart, O., and J. Moore (1998), “Default and Renegotiation: A Dynamic Model of

    Debt,” Quarterly Journal of Economics 113, 1-41. ? Dewatripont, M., and J. Tirole (1994), “A Theory of Debt and Equity: Diversity

    of Securities and Manager-Shareholder Congruence,” Quarterly Journal of

    Economics 109, 1027-1054.

    ? Fluck, Z. (1998), “Optimal Financial Contracting: Debt versus Outside Equity,”

    Review of Financial Studies 11, 383-418.

    ? Myers, S. (2000), “Outside Equity,” Journal of Finance 3, 1005-1037.

    Financing constraints

    ? Hayashi, F., 1982, Tobin's Marginal q and Average q: A Neoclassical

    Interpretation, Econometrica 50, 213-24.

    ? Fazzari, S.M., R.G. Hubbard, and B.P. Petersen, 1988, Financing Constraints and

    Corporate Investment, Brookings Papers on Economic Activity 1, 141-195.

    ? Cleary, S., 1999, The Relationship Between Firm Investment and Financial Status,

    Journal of Finance 54, 673-92.

    ? Gilchrist, S. and C.P. Himmelberg, 1995, Evidence on the Role of Cash Flow for

    Investment, Journal of Monetary Economics 36, 541-72.

    ? Hubbard, R.G., 1998, Capital-Market Imperfections and Investment, Journal of

    Economic Literature 36, 193-225.

    ? Kaplan, S. and L. Zingales, 1997, Do Financing Constraints Explain Why

    Investment Is Correlated with Cash Flow?, Quarterly Journal of Economics 112,


    ? Fazzari, Steven R. Glenn Hubbard, and Bruce Petersen, 2000, Investment-cash

    flow sensitivities are useful: a comment on Kaplan and Zingales, Quarterly

    Journal of Economics 115, 695-705.

    ? Kaplan, S. and L. Zingales, 2000, Investment-Cash Flow Sensitivities Are Not

    Valid Measures of Financing Constraints, Quarterly Journal of Economics 115,


    ? Erickson, T. and T.M. Whited, 2000, Measurement Error and the Relationship

    Between Investment and Q, Journal of Political Economy 108, 1027-57.

    ? Alti, A., 2003, How Sensitive Is Investment to Cash Flow When Financing Is

    Frictionless?, Journal of Finance 58, 707-722.

    ? Moyen, Nathalie, 2004, Investment-cash flow sensitivities: Constrained versus

    unconstrained firms, Journal of Finance 69, 2061-2092.

    ? Hoshi, T., A.K. Kashyap, and D. Scharfstein, 1991, Corporate Structure, Liquidity,

    and Investment: Evidence from Japanese Industrial Groups, Quarterly Journal of

    Economics 106, 33-60.

    ? Blanchard, Olivier Jean, Florencio Lopez-de-Silanes, and Andrei Shleifer, 1994,

    What do firms do with cash windfalls?, Journal of Financial Economics 36, 337-


    ? Lamont, O., 1997, Cash Flow and Investment: Evidence from Internal Capital

    Markets, Journal of Finance 52, 83-109.

    ? Rauh, J., 2006, Investment and financing constraints: Evidence from the funding

    of corporate pension plans, Journal of Finance 61, 33-71. ? Whited, T., 1992, Debt, Liquidity Constraints, and Corporate Investment:

    Evidence from Panel Data, Journal of Finance 47, 1425-60. ? Hennessy, C., and T. Whited, 2007, How costly is external financing? Journal of

    Finance 62, 1705-1745.

    Capital Structure Policy

    ? Titman, Sheridan, and Roberto Wessels, 1988, The determinants of capital

    structure choice, Journal of Finance 43, 1-19.

    ? Rajan, Raghuram G., and Luigi Zingales, 1995, What do we know about capital

    structure? Some evidence from international data, Journal of Finance 50, 1421-


    ? Shyam-Sunder, L., and S.C. Myers, 1999, Testing static tradeoff against pecking

    order models of capital structure, Journal of Financial Economics 51, 219-244. ? Fama, E., and K. French, 2002, Testing tradeoff and pecking order predictions

    about dividends and debt, Review of Financial Studies 15, 1-33. ? Frank, M.Z., and V.K. Goyal, 2003, Testing the pecking order theory of capital

    structure, Journal of Financial Economics 67, 217-248.

    ? Baker, Malcolm, and Jeffrey Wurgler, 2002, Market timing and capital structure,

    Journal of Finance 57, 1-32.

    ? Alti, Aydogan, 2006, How persistence is the impact of market timing on capital

    structure? Journal of Finance 61, 1681-1710.

    ? Strebulaev, Ilya, 2007, Do tests of capital structure theory mean what they say?

    Journal of Finance 62, 1747-1787.

    ? Leary, Mark T., and Michael R. Roberts, 2005, Do firms rebalance their capital

    structures? Journal of Finance 60, 2575-2619.

? Welch, Ivo, 2004, Capital structure and stock returns, Journal of Political

    Economy 112, 106-131.

    Capital raising and security issuance

    ? "Security Offerings", B. E. Eckbo, Ronald W. Masulis and Øyvind Norli,

    Handbook of Corporate Finance: Empirical Corporate Finance (North-

    Holland/Elsevier), Ch 13.

    Financial Intermediation; lending channel and supply-side effects in corporate financing

    ? Bhattacharya, S., and A. Thakor (1993), “Contemporary Banking Theory,”

    Journal of Financial Intermediation 3, 2-50.

    ? Freixas, X., and J-C. Rochet (1997), Microeconomics of Banking, MIT Press. ? Calomiris, C., and C. Kahn (1991), “The Role of Demandable Debt in Structuring

    Optimal Banking Arrangements,” American Economic Review 81, 497-513. ? Diamond, D., and P. Dybvig (1983), “Bank Runs, Deposit Insurance, and

    Liquidity,” Journal of Political Economy 91, 401-419.

    ? Gorton, G., and G. Pennacchi (1990), “Financial Intermediaries and Liquidity

    Creation,” Journal of Finance 45, 49-71.

    ? Jacklin, C. (1987) “Demand Deposits, Trading Restrictions, and Risk Sharing,” in

    Prescott, E., and N. Wallace (eds.), Contractual Arrangements for Intertemporal

    Trade, University of Minnesota Press.

    ? Boyd, J., and E. Prescott (1986), “Financial Intermediary-Coalitions,” Journal of

    Economic Theory 38, 211-232.

    ? Diamond, D. (1984), “Financial Intermediation and Delegated Monitoring,”

    Review of Economic Studies 51, 393-414.

    ? Diamond, D. (1991a), “Monitoring and Reputation: The Choice Between Bank

    Loans and Directly Placed Debt,” Journal of Political Economy 99, 689-721. ? James, C. (1987), “Some Evidence on the Uniqueness of Bank Loans,” Journal of

    Financial Economics 19, 217-235.

    ? Petersen, M., and R. Rajan (1994), “The Benefits of Lending Relationships:

    Evidence from Small Business Data,” Journal of Finance 49, 3-37. ? Petersen, M., and R. Rajan (1995), “The Effect of Credit Market Competition on

    Lending Relationships,” Quarterly Journal of Economics 110, 407-443. ? Rajan, R. (1992), “Insiders and Outsiders: The Choice Between Relationship and

    Arm’s Length Debt,” Journal of Finance 47, 1367-1400.

    ? Sharpe, S. (1990), “Asymmetric Information, Bank Lending, and Implicit

    Contracts: A stylized Model of Customer Relationships,” Journal of Finance 45,


    ? Holmstrom, Bengt, and Jean Tirole, 1997, Financial intermediation, loanable

    funds, and the real sector, Quarterly Journal of Economics 112, 663-691.

    Industry equilibrium of liquidation values and debt capacity

    ? Shleifer, Andrei, and Robert W. Vishny, 1992, Liquidation values and debt

    capacity: A market equilibrium approach, Journal of Finance 47, 1343-1366.

    Stock market and managerial incentives: Earnings and investment manipulation

    ? Stein, Jeremy C, 1989, Efficient capital markets, inefficient firms: A model of

    myopic corporate behavior, Quarterly Journal of Economics 104, 429-455. ? Aghion, Phillippe, and Jeremy C. Stein, 2008, Growth vs. margins: Destabilizing

    consequences of giving the stock market what it wants, Journal of Finance,


    ? Philippon, Thomas, and Simi Kedia, 2008, The economics of fraudulent

    accounting, Review of Financial Studies, forthcoming.

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