AØKK08202U Corporate Finance Theory

Volume 2014/2015
Education
MSc in Economics
Content

Some of the central issues in Finance relate to the financing decisions of firms, in particular the relative use of bond and equity financing. Key aspects of this capital-structure decision include the tax advantages of debt, costly bankruptcy, risk management and hedging, using the capital structure to control managers, and signaling to the market using the capital structure. We also consider the market for corporate control, with leveraged buyouts as well as mergers and acquisitions.

Learning Outcome

Corporate Finance Theory builds on the third-year course's investigation into firm capital structure. We take for granted that course participants have already received a full introduction to the principles of corporate finance. We now go deeper into the particular details of some of these arguments. To accomplish this, we go beyond the textbook and base the course on classic and new articles from academic finance journals. The tools and knowledge obtained in this course are of immediate relevance for graduates seeking employment in the business and financial industries.
The final exam tests the students' specific and general knowledge of the aforementioned aspects of corporate finance theory, emphasizing three abilities:

  1. The ability to readily explain and discuss key theoretical concepts and results from academic articles, as well as their interpretation,
  2. The ability to carefully derive and analyze results within an advanced, mathematically-specified theoretical model,
  3. The ability to apply the most relevant theoretical apparatus to analyze a given, new case-based problem.

In order to pass the course, the student must show satisfactory performance in all three areas.

The plan for Fall 2014 is to read approximately eight recently-published academic articles and working papers in the field of corporate finance. We will devote approximately one week (two lectures) to each article, supplemented by in-class discussions of related real-world issues in corporate finance.

The preliminary reading list is as follows (subject to change). Links to these papers will be posted on the course homepage.

  1. Admati, DeMarzo, Hellwig, and Pfleiderer (2013). “The leverage ratchet effect.” No. 2013/13. Preprints of the Max Planck Institute for Research on Collective Goods.
  2. Malenko and Malenko (2014). "A theory of LBO activity based on repeated debt-equity conflicts." Mimeo, Available at SSRN: http:/​/​ssrn.com/​abstract=2251169
  3. Banal-Estañol, Ottaviani, and Winton (2013). "The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination." Review of Financial Studies
  4. Almeida, Campello and Hackbarth (2011), “Liquidity Mergers,” Journal of Financial Economics, 102(3), 526–558.
  5. Povel and Singh (2010): “Stapled Finance,” Journal of Finance 65(3), 927–953.
  6. Povel and Sertsios. "Getting to know each other: The role of toeholds in acquisitions." Journal of Corporate Finance 26 (2014): 201-224.
  7. Bayar and Chemmanur (2011), “IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists,” Journal of Financial and Quantitative Analysis 46(6), 1755–1793.
  8. DeMarzo, Livdan and Tchistyi (2014), “Risking Other People’s Money: Gambling, Limited Liability, and Optimal Incentives,” Stanford Business School Working PaperNo.3149.
Students are expected to have passed the third-year course Corporate Finance and Incentives, or an equivalent elaborate introduction to Finance. In particular, students should have a good understanding of the topics covered in Part 5 (Capital Structure) of the textbook “Corporate Finance” by Jonathan Berk and Peter DeMarzo, or in another book of a similar level.
2 two lectures of two hoursper week, beginning on October 20 and continuing until the end of term (week 50). All lectures are given in English.
  • Category
  • Hours
  • Lectures
  • 32
  • Total
  • 32
Credit
7,5 ECTS
Type of assessment
Written assignment
The final exam consists of two take-home assignments, and is graded on a pass/fail basis. Both assignments must be submitted in English.
Marking scale
passed/not passed
Censorship form
No external censorship
Re-exam
The default format for the re-exam is also a take-home assignment. However, if few students have registered for the re-exam, the format may be changed to an oral exam.
Criteria for exam assesment

The Student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.