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.

Research-Led Teaching

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. Through assessment tasks, students will be capable of effectively transforming inputs to outputs.

Recommended Resources

There is no prescribed textbook for this course, but there are set readings for each topic (reading list can be accessed through the library's online journal subscriptions or collections):

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.

   

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.

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.

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.

Asymmetric information model

a. Hayne Leland and David H Pyle, 1977, "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance 32: 371-387.

b. Stephen A. Ross, 1977, "The Determination of Financial Structure: The Incentive-Signalling Approach," The Bell Journal of Economics, 8: 23-40.

c. Stewart C. Myers and Nicholas S. Majluf, 1984, “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have,” Journal of Financial Economics, 13: 187-221.

d. Kevin Rock, 1986, “Why New Issues Are Underpriced?” Journal of Financial Economics, 15: 187-212.

Continuous-time model

a. Robert Merton, 1974, "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance 29: 449-470.

b. Hayne Leland, 1994, "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance 49: 1213-1252.

c. Hayne Leland, 1998, " Agency Costs, Risk Management, and Capital Structure," Journal of Finance 53: 1213-1243.

d. Robert Goldstein, Nengjiu Ju, Hayne Leland, 2001, "An EBIT-Based Model of Dynamic

Capital Structure," Journal of Business 74: 483-512.

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.   

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.

  

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.

Application

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.

b. Vladimir A. Atanasov and Bernard S. Black, 2015, "Shock-Based Causal Inference in Corporate Finance and Accounting Research," Critical Finance Review: forthcoming.

c. Kai Li and Nagpurnanand Prabhala, 2005, "Self-Selection Models in Corporate Finance,"

Robert H. Smith School Research Paper. 

d. Mark Egan, Ali Hortaçsu, and Gregor Matvos, 2016, "Deposit Competition and Financial Fragility: Evidence from the U.S. Banking Sector," American Economic Review: forthcoming.

e. 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.

I will add some new papers that test corporate finance theories, which will be announced later. 

Staff Feedback

Students will be given feedback in the following forms in this course:

• Written comments
• Verbal comments
• Feedback to the whole class, to groups, to individuals, focus groups

Student Feedback

ANU is committed to the demonstration of educational excellence and regularly seeks feedback from students. Students are encouraged to offer feedback directly to their Course Convener or through their College and Course representatives (if applicable). The feedback given in these surveys is anonymous and provides the Colleges, University Education Committee and Academic Board with opportunities to recognise excellent teaching, and opportunities for improvement. The Surveys and Evaluation website provides more information on student surveys at ANU and reports on the feedback provided on ANU courses.

Other Information

Due to the small size of the class, it would be appreciated that if you wish to visit during consultation, that you make an appointment so that I can make other plans during that time if consultation is not needed.

Class Schedule

Week/Session	Summary of Activities	Assessment
1	Introduction/Capital structure
2	Capital structure
3	Capital structure
4	Capital structure	Problem set 1 due
5	Banking
6	Banking	Referee report due
7	Banking
8	Investment	Presentation, Problem set 2 due
9	Investment	Presentation
10	Application	Presentation
11	Application	Presentation
12	Application	Presentation
13	Examination period	Project due

Assessment Summary

Assessment task	Value	Due Date	Return of assessment	Learning Outcomes
Problem set 1	10 %	16/08/2019	27/08/2019	1-4
Problem set 2	10 %	27/09/2019	08/10/2019	1-4
Referee report	20 %	30/08/2019	17/09/2019	1-4
Presentation	20 %	23/09/2019	30/09/2019	1-4
Project	40 %	08/11/2019	23/11/2019	1-4

* If the Due Date and Return of Assessment date are blank, see the Assessment Tab for specific Assessment Task details

Policies

ANU has educational policies, procedures and guidelines, which are designed to ensure that staff and students are aware of the University’s academic standards, and implement them. Students are expected to have read the Academic Misconduct Rule before the commencement of their course. Other key policies and guidelines include:

• Student Assessment (Coursework) Policy and Procedure
• Special Assessment Consideration Policy and General Information
• Student Surveys and Evaluations
• Deferred Examinations
• Student Complaint Resolution Policy and Procedure

Assessment Requirements

The ANU is using 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. For additional information regarding Turnitin please visit the ANU Online website Students may choose not to submit assessment items through Turnitin. In this instance you will be required to submit, alongside the assessment item itself, hard copies of all references included in the assessment item.

Moderation of Assessment

Marks that are allocated during Semester are to be considered provisional until formalised by the College examiners meeting at the end of each Semester. If appropriate, some moderation of marks might be applied prior to final results being released.

Assessment Task 1

Problem set 1

Students solve one stylized model that focuses on the interaction of decision maker's commitment and optimal capital structure. The output shall be submitted through Turnitin. Students are expected to receive the task by the end of July. The length of responses is expected to be approximately five pages (double spaced) of a A4 paper with the margin of 1 inch, although no formal minimum or maximum page length applies.

Assessment Task 2

Problem set 2

Students solve problems related to lectures (e.g., proving theorems, solving slightly different versions from models presented in lectures). The output shall be submitted through Turnitin. Students are expected to receive the task by the end of July. The length of responses is expected to be approximately 5 pages (double spaced) of a A4 paper with the margin of 1 inch, although no formal minimum or maximum page length applies.

Assessment Task 3

Referee report

Students read one unpublished corporate finance paper and write a referee report. The output shall be submitted through Turnitin. Students are expected to receive the task by early August. The length of responses is expected to be less than 300 words.

Assessment Task 4

Presentation

Students present one of recently published or frequently circulated papers in corporate finance. Presentations will be held in Weeks 8-12 of the course and will be recorded using the Echo360 lecture capture. Presentation materials are submitted through Turnitin. Students are expected to receive the task by early August. The length of presentation is around 75 minutes.

Assessment Task 5

Project

Students make one big model related to corporate decision following my instructions. The output shall be submitted through Turnitin by the COB of the due date. Students are expected to receive the task by early August. The length of responses is expected to be around 10 pages (double spaced) of a A4 paper with the margin of 1 inch, although no formal minimum or maximum page length applies.

Academic Integrity

Academic integrity is a core part of our culture as a community of scholars. At its heart, academic integrity is about behaving ethically. This means that all members of the community commit to honest and responsible scholarly practice and to upholding these values with respect and fairness. The Australian National University commits to embedding the values of academic integrity in our teaching and learning. We ensure that all members of our community understand how to engage in academic work in ways that are consistent with, and actively support academic integrity. The ANU expects staff and students to uphold high standards of academic integrity and act ethically and honestly, to ensure the quality and value of the qualification that you will graduate with. The University has policies and procedures in place to promote academic integrity and manage academic misconduct. Visit the following Academic honesty & plagiarism website for more information about academic integrity and what the ANU considers academic misconduct. The ANU offers a number of services to assist students with their assignments, examinations, and other learning activities. The Academic Skills and Learning Centre offers a number of workshops and seminars that you may find useful for your studies.

Online Submission

You will be required to electronically sign a declaration as part of the submission of your assignment. Please keep a copy of the assignment for your records. Unless an exemption has been approved by the Associate Dean (Education) as submission must be through Turnitin.

Hardcopy Submission

For some forms of assessment (hand written assignments, art works, laboratory notes, etc.) hard copy submission is appropriate when approved by the Associate Dean (Education). Hard copy submissions must utilise the Assignment Cover Sheet. Please keep a copy of tasks completed for your records.

Late Submission

No submission of assessment tasks without an extension after the due date will be permitted. If an assessment task is not submitted by the due date, a mark of 0 will be awarded.

Referencing Requirements

Accepted academic practice for referencing sources that you use in presentations can be found via the links on the Wattle site, under the file named “ANU and College Policies, Program Information, Student Support Services and Assessment”. Alternatively, you can seek help through the Students Learning Development website.

Returning Assignments

Assignment grades are returned through Turnitin. They accompany comments in some assignments.

Extensions and Penalties

Extensions and late submission of assessment pieces are covered by the Student Assessment (Coursework) Policy and Procedure The Course Convener may grant extensions for assessment pieces that are not examinations or take-home examinations. If you need an extension, you must request an extension in writing on or before the due date. If you have documented and appropriate medical evidence that demonstrates you were not able to request an extension on or before the due date, you may be able to request it after the due date.

Privacy Notice

The ANU has made a number of third party, online, databases available for students to use. Use of each online database is conditional on student end users first agreeing to the database licensor’s terms of service and/or privacy policy. Students should read these carefully. In some cases student end users will be required to register an account with the database licensor and submit personal information, including their: first name; last name; ANU email address; and other information. In cases where student end users are asked to submit ‘content’ to a database, such as an assignment or short answers, the database licensor may only use the student’s ‘content’ in accordance with the terms of service — including any (copyright) licence the student grants to the database licensor. Any personal information or content a student submits may be stored by the licensor, potentially offshore, and will be used to process the database service in accordance with the licensors terms of service and/or privacy policy. If any student chooses not to agree to the database licensor’s terms of service or privacy policy, the student will not be able to access and use the database. In these circumstances students should contact their lecturer to enquire about alternative arrangements that are available.

Distribution of grades policy

Academic Quality Assurance Committee monitors the performance of students, including attrition, further study and employment rates and grade distribution, and College reports on quality assurance processes for assessment activities, including alignment with national and international disciplinary and interdisciplinary standards, as well as qualification type learning outcomes. Since first semester 1994, ANU uses a grading scale for all courses. This grading scale is used by all academic areas of the University.

Support for students

The University offers students support through several different services. You may contact the services listed below directly or seek advice from your Course Convener, Student Administrators, or your College and Course representatives (if applicable).

• ANU Health, safety & wellbeing for medical services, counselling, mental health and spiritual support
• ANU Diversity and inclusion for students with a disability or ongoing or chronic illness
• ANU Dean of Students for confidential, impartial advice and help to resolve problems between students and the academic or administrative areas of the University
• ANU Academic Skills and Learning Centre supports you make your own decisions about how you learn and manage your workload.
• ANU Counselling Centre promotes, supports and enhances mental health and wellbeing within the University student community.
• ANUSA supports and represents undergraduate and ANU College students
• PARSA supports and represents postgraduate and research students