Corporate Finance Theory

This course presents major theoretical concepts of modern corporate finance and initiates the students to the state-of-the-art thinking in the field. We will analyze the ideas behind these theories and their rationale, and discuss how these concepts can be applied to corporate finance issues in practice. The course will also acquaint students with the methodology used in corporate finance, in order to enable them to follow advances in corporate finance research on their own.

Course Objectives

In the first part of the course, we will discuss basic concepts and theoretical explanations of corporate financial policy. After a brief review, we will get familiar with the main concepts and tools determining capital structure: asymmetric information, incentives, and conflicts between managers and investors. We will introduce the major modern capital structure theories, such as debt overhang, the pecking order model, financial signalling, and the role of cash. We will study how agency conflicts are intertwined with financial policy and look at the implications for incentives, and as well as risk-shifting and strategic effects of capital structure decisions. We will briefly look at empirical evidence and payout policy.

In the final sessions of the course, we present and discuss models of takeovers and mergers. We analyze their role in the working of the market for corporate control, and how they contribute to our understanding of M&A transactions.

Course Content

Concepts and Financial Policy
Capital Structure:

  • Review and Debt Overhang
  • Debt Overhang and Financial Signaling
  • Means of Payment and Pecking Order
  • Agency Cost of Equity and Managerial Incentives
  • Risk-Shifting

Market Timing and Free Cash Flow
Empirical Evidence and Payout Policy

Takeovers and Mergers