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FIN 395-5 Corporate Finance - Alti

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FIN 395-5 Corporate Finance - Alti

FIN 395.5 - Spring 2006 - 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.

    Materials:

    - 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,

    2005

    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

    Grading:

    - 40% final exam

    - 30% midterm exam

    - 20% homework assignments

    - 10% class participation

TENTATIVE SCHEDULE

    Financial policy: General theories

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

    capital structure

    2. Basic agency ideas: 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

    Financial policy: Empirical approaches to general theories 5. Capital structure: Determinants; trade-off versus pecking order; market timing, inertia;

    dynamic models

    6. Financing constraints: Investment-cash flow sensitivity

    Further topics (theory and/or empirics): The list below is still quite tentative I may change the order or add/delete topics

    7. Industry equilibrium:

    - Liquidation values of specialized assets: Shleifer and Vishny (1992),

    Pulvino (1998)

    - Equity holder debt holder conflicts: Maksimovic and Zechner (1991)

    - Empirical facts: Almazan and Molina (2005)

    8. Efficiency of multi-divisional firms: Internal capital markets theories and the

    diversification discount

    - Stein (1997), Scharfstein and Stein (2000), Rajan, Servaes, and Zingales

    (2000)

    - Schoar (2002), Maksimovic and Phillips (2002), Chevalier (2004),

    Graham, Lemmon, and Wolf (2002), others

    9. Initial public offerings: Puzzles, theories, current research

    10. Financial intermediation; Costs and benefits of informed finance: Rajan (1992) 11. Lending channel and supply-side effects in corporate financing: Holmstrom and

    Tirole (1997)

12. Information from stock prices to cash flows

    13. Stock market and managerial incentives: Earnings manipulation 14. Labor market and managerial incentives: Herding 15. Investor protection, international corporate finance

Reading List:

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

    Capital Structure

    ; 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.

    2. Basic agency ideas: 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-

    360.

    ; 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.

    3. 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.

    4. 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-

    585.

    ; 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.

    5. Capital structure empirics and dynamics

    6. Financing constraints empirics: Investment-cash flow sensitivity FHP, KZ, Alti?, Gilchrist and Himmelberg, Erickson and Whited, Hoshi et al, Lamont, Rauh

    8. Financial intermediation: Rajan model, Rajan empirical papers, maybe Diamond reputation and monitoring?

    9. Industry equilibrium: Shleifer and Vishny, Maksimovic and Zechner, Almazan and Mollina?, Pulvino?, Holmstrom and Tirole 97, Tirole book last section

XX. Debt structure

    ; Berglof, E., and E-L von Thadden (1994), “Short-Term v. Long-Term Interests:

    Capital Structure with Multiple Investors,” Quarterly Journal of Economics 109,

    1055-1084.

    ; Berkovitch, E., and E.H. Kim (1990), “Financial Contracting and Leverage

    Induced Over- and Under-Investment Incentives,” Journal of Finance 45, 765-

    794.

    ; Bolton, P., and D. Scharfstein (1996), “Optimal Debt Structure and the Number of

    Creditors,” Journal of Political Economy 104, 1-25.

    ; Diamond, D. (1989), “Reputation Acquisition in Debt Markets,” Journal of

    Political Economy 97, 828-862.

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

    Loans and Directly Placed Debt,” Journal of Political Economy 99, 689-721.

    ; Diamond, D. (1991b), “Debt Maturity Structure and Liquidity Risk,” Quarterly

    Journal of Economics 106, 709-737.

    ; Diamond, D. (1993), “Seniority and Maturity Structure of Debt Contracts,”

    Journal of Financial Economics 33, 341-368.

    ; Shleifer, A., and R. Vishny (1992), “Liquidation Values and Debt Capacity: A

    Market Equilibrium Approach,” Journal of Finance 47, 1343-1366.

    ; Smith, C., and J. Warner (1979), “On Financial Contracting: An Analysis of Bond

    Covenants,” Journal of Financial Economics 7, 117-161.

    ; Stulz, R., and H. Johnson (1985), “An Analysis of Secured Debt,” Journal of

    Financial Economics 14, 501-522.

    ;

    6. Financial Intermediation

    ; 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.

    a. Banking and Liquidity Provision

    ; 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.

    b. Bank Lending

    ; 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,

    1069-1087.

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