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Syllabus for Business Finance (FIN 7310)

Fall 2005

Instructor: Nina Baranchuk TA: Xuying Cao


Office Hours: W, Th 2:00 – 4:00 pm. Office Hours:
Office: SOM 3.430 Office: SM2.409
Email: nina.baranchuk@utdallas.edu Email: xuying.cao@student.utdallas.edu
Phone: (972) 883-4771 Phone (972) 883-4833

COURSE DESCRIPTION
The goal of this graduate level course is to provide an introduction into current theoretical
research in corporate finance, covering a broad range of topics. Special attention will be paid to
developing techniques for model writing and analysis. Students will also have a chance to
practice written and oral presentation of their research ideas.

TEXTBOOK
The main reading is the textbook by Joao Amaro De Matos, “Theoretical Foundations of
Corporate Finance”, Princeton university press, 2001.

REQUIREMENTS AND GRADING


Each student is required to select one paper for presentation from the reading list offered
in this syllabus. You may choose to present a paper not included in the list, but you have
to discuss your choice with me first. The deadline for selecting papers for presentations is
September 6.

In addition to the presentation, each student is required to write a term paper. The term
paper should be written as a referee report on the paper you choose for your oral
presentation. More specific guidelines on writing a term paper will be posted on WebCT
by September. The term paper will be due November 15.

Your grade will be determined by a presentation (20%), a term paper (40%), and a final
exam (40%). There also will be several homework assignments. These assignments will
NOT be graded. Instead, they will serve as a basis for the final exam. The final exam will
also include questions about the papers discussed in class.
TENTATIVE COURSE OUTLINE

Date Topics Textbook


August 23 Introduction; Valuation 1
August 30 MM Propositions 2
September 6 Capital Structure and Agency Costs 3.1
September 13 Informational Asymmetries 3.2
September 20 Dynamic Models of Capital Structure --
September 27 Allocation of Control 5.1
October 4 Allocation of Control 5.1
October 11 Financial Contract Design 5.2
October 18 Dividends: MM Proposition 4.1
October 25 Dividends and Stock Repurchases 4.2, 4.3
November 1 Going Public 6
November 8 Going Private
7
Term paper due!
November 15 Mergers and Acquisitions 8
November 22 Governance Issues --
Check the Web Final Examination
READING LIST
1. Valuation
• Harris, M. and A. Raviv, 1993, “Differences of Opinion Make a Horse
Race,” Review of Financial Studies 6, pp.473 – 506
• Hirshlifer, D., 2001, “Investor Psychology and Asset Pricing,” The Journal
of Finance 56, pp. 1533 – 1597.
• Scharfstein, D. and Jeremy Stein, 1990, “Herd Behavior and Investment,”
American Economic Review 80, pp. 465 – 479.

2. Capital Structure
• Myers S., and Majluf, 1984, “Corporate Financing and investment
Decisions when Firms Have Information That Investors Do Not Have”
Journal of Financial Economics 13, pp. 187 – 221.
• Leland, H., 1998, “Agency Costs, Risk Management, and Capital
Structure,” The Journal of Finance 53, pp. 1213 – 1243.
• Biais, B., and C. Casamatta, 1999, “Optimal Leverage and Aggregate
Investment,” The Journal of Finance 54, pp. 1291 – 1323.
• Allen, J. and G Phillips, 1998, “Corporate Equity Ownership and Product
Market Relationship,” Journal of Finance pp.
• Harris, M., and A. Raviv, 1991, “The Theory of Capital Structure,” The
Journal of Finance 46, pp. 297 – 355.
• Bolton, P. and D. Sharfstein, 1990, “A Theory of Predation Based on
Agency Problems in Financial Contracting,” American Economic Review
80, pp. 93 – 103.
• Maksimovic, V., 1995, “Financial Structure and Product Market
Competition,” in Jarrow, R., V. Maksimovic and W. Ziemba, (eds.),
Handbook of Finance, North-Holland.
• Stein, J., 1996, “Rational Capital Budgeting in an Irrational World,”
Journal of Business 69, pp. 429 – 455.
• Leland, H. and D Pyle, 1977, “Information Asymmetries, Financial
Structure, and Financial Intermediation,” The Journal of Finance 32
pp.371 – 387.
• Baker, M. and Jeffrey Wurgler, 2002, “Market Timing and Capital
Structure,” The Journal of Finance 57, pp. 1 – 32.

3. Allocation of Control
• Aghion P and Bolton P (1989) The Financial Structure of the Firm and the
Problem of Control, European Economic Review.
• Aghion, P., J. Tirole, 1994, “On the management of innovation,”
Quarterly Journal of Economics 109, pp. 1185-1207.
• Aghion P and Bolton P (1992) An Incomplete Contracts Approach to
Financial Contracting, Review of Economic Studies 59(3): 473-494.

4. Financial Contract Design


• Biais, B., and T. Mariotti, 2003, “Strategic Liquidity Supply and Security
Design,” working paper
• Boot, A., and A. Thakor, 1993, “Security Design,” The Journal of Finance
48, pp. 1349 – 1378.
• Harris, M. and A Raviv, 1989, “The Design of Securities,” Journal of
Financial Economics 24, pp. 255 – 287.
• Hart, O., 2001, “Financial Contracting,” Journal of Economic Literature
pp. 1079 – 1100.

5. Dividends and Stock Repurchases


• Jensen, M., 1986m, “Agency Costs of Free Cash Flow,” American
Economic Review 76, 323 – 329.
• Miller, M. and Kevin Rock, 1985, “Dividend Policy under Asymmetric
Information,” The Journal of Finance 40, 1031 – 1052.
• Kumar, P. 1988, “Shareholder-Manager Conflict and the Information
Content of Dividends,” Review of Financial Studies 1, pp. 111 – 136.
• Naranjo, A. M. Nimalendran, and M. Ryngaert, 1998, “Stock Returns,
Dividend Yields, and Taxes,” The Journal of Finance 53, pp. 2029 – 2057.
• Dittmar, A. “Why Do Firms Repurchase Stock?” Journal of Business 73,
pp. 331 – 355.

6. Going Public
• Yung, C., 2005, “IPOs with Buy and Sell-Side Information Production:
The Dark Side of Open Sales,” Review of Financial Studies 18, pp 327 –
347.
• Rock, K., 1986, ‘‘Why New Issues Are Underpriced,’’ Journal of
Financial Economics 15, pp. 18`7 – 212.
• Chemmanur, T., 1993, ‘‘The Pricing of Initial Public Offerings: A
Dynamic Model with Information Production,’’ The Journal of Finance
48, 285 – 304.
• Welch, I, 1992, “Sequential Sales, Learning, and Cascades,” Journal of
Finance 47, pp. 695 – 732.

7. Going Private
• Elitzur, R., P. Halpern, R. Kieschnick, and W. Rotenberg, 1998,
“Managerial Incentives and the Structure of Management Buyouts,”
Journal of Economic Behavior and Organization 36, pp. 347 – 367.

8. Mergers and Acquisitions


• Grossman, S., O. Hart, 1980, “Takeover Bids, the Free Rider Problem, and
the Theory of the Corporation,” Bell Journal of Economics 11, pp. 42 –
64.
• Roll, R. 1986, “The Hubris Hypothesis of Corporate Takeovers,” Journal
of Business 59, pp.197 – 216.
• Shleifer, A. and R. Vishny, 2003, “Stock Market Driven Acquisitions,”
Journal of Financial Economics 70, pp. 295 – 311.

9. Governance
• Jensen, M. and Meckling, 1976, “Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure,” Journal of Financial
Economics pp. 305 – 360.
• Shleifer, A. and R. Vishny, 1997, “A Survey of Corporate Governance,”
Journal of Finance 52, pp. 737 – 783.
• LaPorta, R., F. Lopez-de-Silanes, A. Shleifer and R. Vishny, “Investor
Protection and Corporate Valuation,” The Journal of Finance 57, pp. 1147
– 1170.
• Grossman, S. and O. Hart, 1982, “Corporate Financial Structure and
Managerial Incentives,” in J.J. McCall, ed., The Economics of Information
and Uncertainty. Chicago: University of Chicago Press.

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