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Syllabus for Business Finance (FIN 7310)

Fall 2005


Nina Baranchuk


Office Hours:

W, Th 2:00 – 4:00 pm.

Office Hours:


SOM 3.430





(972) 883-4771


Xuying Cao

SM2.409 (972) 883-4833


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.


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


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.





August 23

Introduction; Valuation MM Propositions Capital Structure and Agency Costs Informational Asymmetries Dynamic Models of Capital Structure Allocation of Control Allocation of Control Financial Contract Design Dividends: MM Proposition Dividends and Stock Repurchases Going Public Going Private Term paper due! Mergers and Acquisitions Governance Issues Final Examination


August 30


September 6


September 13


September 20


September 27


October 4


October 11


October 18


October 25

4.2, 4.3

November 1


November 8


November 15 November 22 Check the Web




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.

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 –


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 –


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.


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.