17
FI 9300
Seminar in Corporate Finance
J. Mack Robinson College of Business
Georgia State University
Fall 2005
Chip Ryan Wednesdays 1:00 – 5:00 Office Hours:
1226 RCB Finance Conference Room -- 1200 By appointment
404-651-2674 or drop by
Objectives: The objective of this course is to prepare doctoral students for research in corporate finance. In this seminar, we will develop an integrated framework for understanding the issues in corporate finance for the purpose of producing research that is publishable in high quality refereed academic journals. Generally, we will study theoretical or conceptual papers on a given topic, with the focus on identifying empirically testable hypotheses. We will then discuss one or more recent or seminal empirical papers on the subject.
Course Materials: Journal articles. You are responsible for obtaining copies of the articles. Try www.jstor.org or Academic Search Premier on the library web site to get as many articles as possible on-line. Many of the forthcoming articles will be available on journal web sites.
Reference Materials: You might find it useful to refer to an advanced Masters level/introductory Ph.D. level corporate text. I recommend Financial Theory and Corporate Policy (Copeland and Weston, Third edition, 1988 Addison-Wesley) or the Fourth edition by Copeland, Weston, and Shastri. Additionally, you might find it useful to refer to any edition of Principles of Corporate Finance (Brealey and Myers or Brealey, Myers, and Allen).
Grading: Your grade for the course will be determined as follows:
(i) Presentations (25% of course grade) You must make at least four presentations of a paper (indicated by #). You will be the instructor and should make a succinct presentation of assigned paper. All students in the class should be prepared to participate in a rigorous discussion of the paper.
(ii) Assignments (25% of course grade): The assignments can be problems, identification of research ideas, literature surveys, reviews, or short articles. The focus will be on analysis, logic, and how well you convey your ideas. Some assignments are on the syllabus, but others could be added during the term.
(iii) Participation (25% of course grade): I expect you to have read and critiqued the assigned papers for a session thoroughly before class. I will evaluate your participation based on the quality of your contribution to class discussions. If the presenter makes a mistake, you should be familiar enough with the papers to identify and help correct the mistake. Thorough preparation and participation in every class is mandatory.
(iv) Term Project (25% of course grade): The term project requires that you formulate and solve a specific and original problem in corporate finance. You have to identify the problem yourself. I suggest that you make an early start. The solution of the problem can be theoretical and/or empirical. The project will be evaluated based on clarity of problem formulation, the technical competence of the solution, and how well you express your ideas. Literature surveys do not constitute an acceptable term project. Some of you may be pursuing a topic as a potential dissertation. Additional work on that topic may be acceptable as the project if it is in the area of corporate finance or if it is amenable to an application of one of the techniques covered in this seminar. You should clear your paper with me before choosing this route. Although I do not require it, I encourage you to submit an abstract to me for feedback and approval of the topic by the middle of the term.
Grading Scale
All grades will be assigned based on a 4 point scale: A (4), B (3), C (2), D (1), and F (0).
Final grades will be assigned as follows.
3.6 – 4.0 A 3.4-3.6 Gray Area
3.0-3.4 B 2.8-3.0 Gray Area
2.0-2.8 C
1.0-2.0 D
0.0-1.0 F
If you fall in the gray area, I will ask to see your notebook of paper summaries (see below). You will receive the higher grade if your summaries are complete, logical, and in good order. If not, you will receive the lower grade.
Presentations
I will generally present and lead the discussion of the theory. Students will present related empirical papers. All students must make at least four presentations.
Paper and Conceptual Summaries
For each paper market with *** and for the two topics under Pre-Reading you should write a written summary in advance of the class in which the paper (or concept) is to be discussed. Your summary should (i) state the research question (ii) indicate why it is important (iii) report key findings and conclusions (iv) provide a brief critique of the paper and (v) outline any additional research ideas you identify. For individual papers, limit your summary to two pages, type written, one-inch margins, and a minimum 10-point font. For summaries of conceptual topics spanning multiple papers you may go up to five pages. Keep your summaries in a loose-leaf notebook, which you should bring to all classes. The summaries will serve as a set of study notes when you prepare for the comprehensive exams and as a quick reference to corporate finance literature when you pursue research. You should adhere to the size limitation. The size limitation provides two important benefits: (i) it forces you to synthesize the material and focus on the key issues (it redirects you from the trees back to the forest) and (ii) it helps you develop the ability to write concisely and logically.
Academic Ethics
I will not tolerate cheating or plagiarism and will prosecute any offenses. I encourage you to discus and debate ideas with your colleagues, but your written work must be your own ideas. Be careful not to plagiarize the work of other. When you discuss ideas, explain concepts, or provide comments on assignments you “help” your friends. When you allow your friend to copy your work, you are both academically dishonest and unethical. If you are not sure if something is ethical, it probably is unethical. Don’t get in trouble – if in doubt, ask me.
Pre-course Reading
You should make sure, either by reading the articles listed below or by reading a textbook treatment, that you understand the principles underlying the Tax and Bankruptcy-based theories of capital structure and the principle of separation of financing and investing/unananimity. Prepare a summary of these two concepts for your notebook (limit each summary to five pages or less).
Tax and Bankruptcy-based theories of capital structure
Copeland, Thomas E. and J. Fred Weston, Financial Theory and Corporate Policy, Third edition, 1988 (Addison-Wesley) 437-543
Franco Modigliani and Merton Miller, The cost of capital, corporation finance and the theory of investment, American Economic Review, (1958), 261-297
Franco Modigiliani and Merton Miller, Corporate income taxes and the cost of capital, American Economic Review, 53 (June 1963), 433-443
Merton Miller, Debt and Taxes, Journal of Finance, (1977), 261-275
Harry DeAngelo and Ronald Masulis, Optimal capital structure under corporate and personal taxation, Journal of Financial Economics, 8 (1980),3-80
J. Scott, A theory of optimal capital structure, Bell Journal Of Economics, (1976), 33-54
Separation of financing and investing and unanimity – foundations of the positive NPV rule
Comment: Make sure that you understand the distinction between perfect and complete markets. Focus on the ideas and don’t get lost in the math.
Copeland, Thomas E. and J. Fred Weston, Financial Theory and Corporate Policy, Third edition, 1988 (Addison-Wesley) 1-20; 109-128
J. Hirshleifer, Investment decision under uncertainty: Choice-theoretic approaches, Quarterly Journal of Economics, (1965), 509-536
Steiner Ekern and Robert Wilson, On the theory of the firm in an economy with incomplete markets, Bell Journal of Economics, 5 (1974), 171-180
N. C. Neilsen, The investment decision of the firm under uncertainty and the allocative efficiency of capital markets, Journal of Finance, 31 (May 1976), 587-602
E. Fama, The effect of a firm’s investment and financing decisions on the welfare of its security holders, American Economic Review, 68 (1978), 272-284
Reading Codes
**** Read thoroughly before class, be prepared to discuss for class, and summarize in one or two pages
# Paper to be presented by a student (approximately 30 minute presentation to leave time for discussion)
I include other papers to provide you with an extensive reference list. Refer to these papers as necessary.
S Survey Article – recommended background reading
Note: You are responsible for knowing the field of corporate finance, and thus by extension all of these papers, for the comprehensive exams.
The following paper is pretty useful in identifying recent developments in corporate finance.
Ritter, J. "Introduction to Recent Developments in Corporate Finance" May 2005, RitterFlyer.pdf
August 24
Empirical evidence on tax-based capital structure theories
*** R. Rajan and L. Zingales, What do we know about capital structure? Some evidence from international data, Journal of Finance 50 (1995), 1421-1460
*** Sheridan Titman and Roberto Wessels, The determinants of capital structure choice, Journal of Finance 43 (March 1988), 1-40
*** # Graham, John R., “How Big Are the Tax Benefits of Debt?,” Journal of Finance 55(5), October 2000, 1901-1941.
Graham, John R., Debt and the marginal tax rate, Journal of Financial Economics 41 (1995) 41-73
D. Givoly, C. Hayn, and A. Ofer, Taxes and capital structure: Evidence from firms’ response to the tax reform act of 1986
Michael Bradley, Gregg Jarrell, and E. Han Kim, On the existence of an optimal capital structure: Theory and evidence, Journal of Finance, 39 (July 1984)
J. Kale, T. Noe, and G. Ramirez, The effect of business risk on corporate capital structure: Theory and evidence, Journal of Finance 46 (December 1991) 1693-1715
Graham, John R., Debt and the marginal tax rate, Journal of Financial Economics 41 (1995) 41-73
4. The importance of bankruptcy costs on capital structure
*** G. Andrade and S. Kaplan, How costly is financial (not economic) distress? Evidence from highly leveraged transactions that become distressed, Journal of Finance 53 (1998) 1443-1493
*** R. Haugen and L. Senbet, The insignificance of bankruptcy costs to the theory of optimal capital structure, Journal of Finance, 33 (1978), 383-393
*** # Bris, Arturo, Ivo Welch, and Ning Zhu. The Costs of Bankruptcy The Journal of Finance, forthcoming. [July 2005]
Weiss, Lawrence, Bankruptcy resolution - direct costs and violation of priority of claims, Journal of Financial Economics, 27 (1990) 285-314
J. Ang, J. Chua, and J. McConnell, The administrative costs of bankruptcy: A note, Journal of Finance, 37 (1982) 219-226
E. Altman, A further empirical investigation of the bankruptcy cost question, Journal of Finance, 39 (1984) 1067-1089
J. Warner, Bankruptcy costs: Some evidence, Journal of Finance, 32 (1977) 337-347
August 31
6. Agency theory and the theory of the firm
*** M. Jensen and W. Meckling, Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics, (1976), 305-360
*** E. Fama and M. Jensen, Separation of ownership and control, Journal of Law and Economics 26 (June 1983) 301-326
*** E. Fama and M. Jensen, Organizational forms and investment decisions, Journal of Financial Economics (1985) 14 101-118
*** Jensen, Michael C., The modern industrial revolution, exit, and the failure of internal control systems, Journal of Finance 48 (1993) 831-880
*** L. Zingales, In search of new foundations, Journal of Finance, 55 (2000), 1623-1653
*** R. Coase, The nature of the firm, Economica, 4 (1937), 386-405.
*** O. Hart and J. Moore, Property rights and the nature of the firm, Journal of Political Economy 98 (1990), 1119-1158.
E. Fama and M. Jensen, Agency problems and residual claims, Journal of Law and Economics 56 (1983) 327-349
E. Fama, Agency problems and the theory of the firm, Journal of Political Economy (1980) 88 288-307.
ASSIGNMENT: Based on the above reading list , write an essay of no more than five pages of text, double-spaced, on the t opic “What is a firm?” Use relevant citations to support your logic. Due on August 31.
September 7
Agency theory explanations of capital structure and debt bonding
*** S. Myers, Determinants of Corporate Borrowing, Journal of Financial Economics, 5 (1977) 147-175.
*** M. Jensen, Agency costs of free cash flow, corporate finance and takeovers, American Economic Review 76, 1986, 323-329.
*** René Stulz, 1990, Managerial discretion and optimal financing policy, Journal of Financial Economics, 26, 3-27
S M. Harris and A. Raviv, The theory of capital structure, Journal of Finance, 46 (1991), 297-355 (also applies to information-based models)
S M. Harris and A. Raviv, Errata: The theory of capital structure, Journal of Finance, 47 1992), 1659
O. Hart, and J. Moore, 1995, Debt and seniority: an analysis of the role of hard claims in constraining management, American Economic Review, 85, 567-585
S. Grossman and O. Hart, 1982, Corporate financial structures and managerial incentives, in The Economics of Information and Uncertainty, ed. J. McCall, University of Chicago Press, Chicago
A. Barnea, R. Haugen, and L. Senbet, Market imperfections, agency problems and capital structure: A review, Financial Management 10 (1981), 7-22
Empirical evidence on agency theory explanations of capital structure and free cash flow
*** # Parrino, Robert and Michael Weisbach, Measuring Investment Distortions Arising from Stockholder-Bondholder Conflicts, Journal of Financial Economics, Vol. 53 (1999) 3-42
***# S. Kaplan, The effects on management buyouts on operating performance and value, Journal of Financial Economics, 24 (1989) 217-254
K. Lehn and A. Poulsen, Free cash flow and stockholder gains in going private transactions, Journal of Finance, 44 (1989) 771-788
W. Mikkelson and M. Partch, Managers’ voting rights and corporate control, Journal of Financial Economics, 25 (1989) 263-290
H. Demsetz and K. Lehn, The structure of corporate ownership: Causes and consequences, Journal of Political Economy, 93 (1985) 1155-1177
A. Agrawal and G. Mandelker, Managerial incentives and corporate investment and financing decisions, Journal of Finance, 42 (1987), 823-837
S. Smith and J. Warner, On financial contracting: An analysis of bond covenants, Journal of Financial Economics, 7 (1979), 117-161
ASSIGNMENT : You must do this assignment twice and in conjunction with another student. I will allow you to form your own two-person teams, but will become involved if necessary to produce a sufficient number of pairs. On a topic of your choice in corporate finance, write a research proposal. The proposal should outline the research question, review the relevant literature, describe the importance of the research and what we will learn, and describe the research approach. You must include at least three working papers in your reference list. The working papers must (i) be from a researcher with multiple top-tier publications or (ii) have been presented or be scheduled for presentation at the ASSA, the WFA, the European Finance Association, the NBER, or some other high-quality conference (only at the FMA or a regional conference does not count).