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 the static trade-off theory, agency problem, principal-agent model, 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:

1. Discuss the main theoretical and empirical methods of modern corporate finance;
2. Critically review previous literature in corporate finance;
3. Derive testable hypotheses in corporate finance and methods to test them; and
4. Communicate in detail 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 continuous-time model and banking. Through assessment tasks, students will be capable of effectively transforming inputs to outputs.

Required Resources

I will provide students with all the presentation materials used for lectures. In addition, interested students may want to read my book:

"Kentaro Asai, 2021, Corporate Finance and Capital Structure: A Theoretical Introduction,”

which is available at the website of ANU library: https://library.anu.edu.au/record=b6960534.

Recommended Resources

Capital structure theory book

a. Jean Tirole, 2006, “The Theory of Corporate Finance.”

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.

   

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.

 

Agency theory

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.

 

Security design

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.

 

Payout policy

a. Sudipto Bhattacharya, 1979, "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics 10: 259-70.

b. Merton Miller and Kevin Rock, 1985, "Dividend Policy under Asymmetric Information," Journal of Finance, 40: 1031-51.

c. Easterbrook, 1984, “Two Agency-Cost Explanations of Dividends,” American Economic Review, 74: 650-9.

d. Eric Floyd, Nan Li and Douglas J. Skinner, 2015, “Payout Policy Through the Financial Crisis: The Growth of Repurchases and the Resilience of Dividends” Journal of Financial Economics, 118: 299-316.

e. Michael Rozeff, 1982, “Growth, Beta and Agency Costs as Determinants of Dividend Payout Ratios,” Journal of Financial Research, 5:249-59.

 

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

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. 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.

d. Franklin Allen and Douglas Gale, 2004, "Competition and Financial Stability," Journal of Money, Credit, and Banking 36: 453-480.

e. John H. Boyd and Gianni De Nicolo, 2005, "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance 60: 1329-1343.

f. David Martinez-Miera and Rafael Repullo, 2010, "Does Competition Reduce the Risk of Bank Failure?," Review of Financial Studies 23: 3638-3664.

  

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. 

 

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 irrelevance
2	Trade-off theory
3	Agency theory
4	Security design I	Problem set 1 due
5	Security design II
6	Asymmetric information	Referee report due
7	Payout policy
8	Continuous-time model I
9	Continuous-time model II	Problem set 2 due
10	Banking	Presentation
11	Application I	Presentation
12	Application II	Presentation
13	Examination period	Project due

Tutorial Registration

There are no tutorials for this course.

Assessment Summary

Assessment task	Value	Due Date	Return of assessment	Learning Outcomes
Problem set 1	20 %	20/08/2021	27/08/2021	1-4
Problem set 2	20 %	08/10/2021	22/10/2021	1-4
Referee report	10 %	03/09/2021	17/09/2021	1-4
Presentation	10 %	12/10/2021	05/11/2021	1-4
Project	40 %	05/11/2021	02/12/2021	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.

Participation

Course content will be delivered in dual-delivery format. Lectures will be held on campus with a Zoom-ready venue. Students will be able to access the lecture by Zoom as well as by physically attending classes.

Examination(s)

There is no final exam in this course.

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 and completed individually. Students are expected to receive the task by July 30. The due of the assignment is August 20. 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 and completed individually. Students are expected to receive the task by August 20. The due of the assignment is October 8. 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 and completed individually. Students are expected to receive the task by August 13. The due of the assignment is September 3. 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 10-12 of the course and will be recorded using Zoom. Presentation materials are submitted through Turnitin. Students are expected to receive the task by August 20. Presentations start from October 12. The length of presentation is around 60 minutes, depending on the number of enrolled students. Presentations are assessed both on content and clarity of delivery. Students need to be able to identify the main contribution of the research paper they are presenting, describe that contribution in non-technical terms, and answer follow-up questions from the instructor or audience. I will provide grading criteria by August 20.

Assessment Task 5

Project

Students generate one comprehensive model relating to corporate decision making following my instructions. The output shall be submitted through Turnitin by the COB on the due date. The project is to be completed individually. Students are expected to receive the task by August 20. The due of the assignment is November 5. 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
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