This course provides an overview of modern corporate finance. The growth of corporate finance has been spectacular since Modigliani and Miller developed the capital-structure irrelevance proposition in 1958. After reviewing Modigliani and Miller (1958), we study the optimal capital structure under the presence of various frictions in which capital structure affects firm value. We cover static trade-off theory, agency problem, principal-agent model, the mechanism design approach of capital structure, and incomplete contracts. In addition, we cover the literature on investment and banking. Lastly, we cover modern empirical methods to test various hypotheses in corporate finance. In particular, we focus on quasi-experimental and structural approaches.
Learning Outcomes
Upon successful completion, students will have the knowledge and skills to:
On satisfying the requirements for this course, students will have the knowledge and skills to:
- Discuss the main theoretical and empirical methods of modern corporate finance.
- Critically review previous papers in corporate finance.
- Be able to derive testable hypotheses in corporate finance and methods to test them.
- Communicate various topics on modern corporate finance to a diverse audience.
Indicative Assessment
Typical assessment may include, but is not restricted to: problem sets, a referee report, a group presentation, and a final project.The ANU uses Turnitin to enhance student citation and referencing techniques, and to assess assignment submissions as a component of the University's approach to managing Academic Integrity. While the use of Turnitin is not mandatory, the ANU highly recommends Turnitin is used by both teaching staff and students. For additional information regarding Turnitin please visit the ANU Online website.
Workload
10 hours per week consisting of a combination of lectures, assignments, and private study time.Requisite and Incompatibility
You will need to contact the Rsch Sch of Finance, Actuarial Studies & App Stats to request a permission code to enrol in this course.
Prescribed Texts
There is no prescribed textbook for this course. However, there are set readings each week:
1. Capital structure choice in a frictionless world
a. Franco Modigliani and Merton H. Miller, 1958, “The Cost of Capital, Corporation Finance, and the Theory of Investment,” American Economic Review 48: 261-297.
b. Merton H. Miller, 1988, “The M-M Propositions After 30 Years,” Journal of Economic Perspectives 2: 99-120.
2. Static trade-off theory
a. Merton H. Miller, 1977, “Debt and Taxes,” Journal of Finance 32: 261-275.
b. James H Scott, 1976, “A Theory of Optimal Capital Structure,” Bell Journal of Economics 7: 33-54.
c. Michael Bradley, Gregg A. Jarrell, E. Han Kim, 1984, "On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance 39: 857-878.
3. Debt overhang, risk shifting, and agency problem
a. Stewart C. Myers, 1977, “Determinants of Corporate Borrowing” Journal of Financial Economics 5: 147-175.
b. Michael C. Jensen and William H. Meckling, 1976, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3: 305-360.
c. Elazar Berkovitch and E. Han Kim, 1990, “Financial Contracting and Leverage Induced Over and Under-Investment Incentives,” Journal of Finance 45: 765-794.
4. Hidden actions, hidden states, and incomplete contracts
a. Bengt Holmstrom, 1979, "Moral Hazard and Observability," Bell Journal of Economics 10: 74-91.
b. Milton Harris and Artur Raviv, 1979, "Optimal Incentive Contracts with Imperfect Information," Journal of Economic Theory 20: 231-259.
c. Robert Innes, 1990, “Limited Liability and Incentive Contracting with Ex-ante Action Choices,” Journal of Economic Theory 52: 45-67.
d. Robert M. Townsend, 1979, Optimal Contracts and Competitive Markets with Costly State Verification, Journal of Economic Theory 21: 265-293.
e. Douglas Gale and Martin Hellwig, 1985, "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies 52: 647-663.
f. Oliver Hart and John Moore, 1988, "A Theory of Debt Based on the Inalienability of Human Capital," Quarterly Journal of Economics 109: 841-879.
g. Philippe Aghion and Patrick Bolton, 1992, "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies 59: 473-494.
5. Banking I
a. Douglas W. Diamond, 1984, “Financial Intermediation and Delegated Monitoring," Review of Economic Studies 51: 393-414.
b. Douglas W. Diamond and Philip H. Dybvig, 1983, "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy 91: 401-419.
c. George G. Pennacchi, 2009, "Deposit Insurance," Paper prepared for AEI Conference on Private Markets and Public Insurance Programs.
d. Joao Santos, 2000, "Bank Capital Regulation in Contemporary Banking Theory: A Review of the Literature," BIS Working Papers.
e. Thomas F. Hellmann, Kevin C. Murdock, and Joseph E. Stiglitz, 2000, "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review 90: 147-165.
f. Rafael Repullo, 2004, "Capital Requirements, Market Power, and Risk-Taking in Banking," Journal of Financial Intermediation 13: 156-182.
6. Banking II
a. Franklin Allen and Douglas Gale, 2004, "Competition and Financial Stability," Journal of Money, Credit, and Banking 36: 453-480.
b. John H. Boyd and Gianni De Nicolo, 2005, "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance 60: 1329-1343.
c. David Martinez-Miera and Rafael Repullo, 2010, "Does Competition Reduce the Risk of Bank Failure?," Review of Financial Studies 23: 3638-3664.
7. Empirical Method I
a. Joshua D. Angrist, Guido W. Imbens, and Donald B. Rubin, 1996, “Identification of Causal Effects Using Instrumental Variables,” Journal of the American Statistical Association 91: 444-455.
8. Empirical Method II
a. Vladimir A. Atanasov and Bernard S. Black, 2015, "Shock-Based Causal Inference in Corporate Finance and Accounting Research," Critical Finance Review: forthcoming.
b. Kai Li and Nagpurnanand Prabhala, 2005, "Self-Selection Models in Corporate Finance,"
Robert H. Smith School Research Paper.
9. Empirical Method III
a. Mark Egan, Ali Hortaçsu, and Gregor Matvos, 2016, "Deposit Competition and Financial Fragility: Evidence from the U.S. Banking Sector," American Economic Review: forthcoming.
b. Gregor Matvos and Amit Seru, 2014, "Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates," Review of Financial Studies 27:1143-1189.
10. Investment under the presence of financial constraints
a. Steven M. Fazzari, Glenn Hubbard, and Bruce C. Petersen, 1988, “Financing Constraints and Corporate Investment,” Brookings Papers on Economic Activity 1988: 141-195.
b. Stephen N. Kaplan and Luigi Zingales, 1997, “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?” Quarterly Journal of Economics 112: 169-215.
c. Toni Whited, 1992, “Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data,” Journal of Finance 47: 1425-1460.
d. Toni Whited and Guojun Wu, 2006, “Financial Constraints Risk,” Review of Financial Studies 19: 541-559.
Depending on students' interests, we may provide additional readings.
Assumed Knowledge
Students will require a solid background in finance, microeconomics, and econometrics.Fees
Tuition fees are for the academic year indicated at the top of the page.
If you are a domestic graduate coursework or international student you will be required to pay tuition fees. Tuition fees are indexed annually. Further information for domestic and international students about tuition and other fees can be found at Fees.
- Student Contribution Band:
- 3
- Unit value:
- 6 units
If you are an undergraduate student and have been offered a Commonwealth supported place, your fees are set by the Australian Government for each course. At ANU 1 EFTSL is 48 units (normally 8 x 6-unit courses). You can find your student contribution amount for each course at Fees. Where there is a unit range displayed for this course, not all unit options below may be available.
| Units | EFTSL |
|---|---|
| 6.00 | 0.12500 |
Course fees
- Domestic fee paying students
| Year | Fee |
|---|---|
| 2018 | $4080 |
- International fee paying students
| Year | Fee |
|---|---|
| 2018 | $5400 |
Offerings, Dates and Class Summary Links
ANU utilises MyTimetable to enable students to view the timetable for their enrolled courses, browse, then self-allocate to small teaching activities / tutorials so they can better plan their time. Find out more on the Timetable webpage.
Class summaries, if available, can be accessed by clicking on the View link for the relevant class number.
Second Semester
| Class number | Class start date | Last day to enrol | Census date | Class end date | Mode Of Delivery | Class Summary |
|---|---|---|---|---|---|---|
| 9711 | 23 Jul 2018 | 30 Jul 2018 | 31 Aug 2018 | 26 Oct 2018 | In Person | N/A |
