Indian Institute of Management, Lucknow

Fellow Programme in Management

Corporate Finance Theory
Term V 2013-14
Faculty
Email

First 10 Sessions
A Vinay Kumar
vinay@iiml.ac.in

Last 10 Sessions
Ajay Garg
ajaygarg@iiml.ac.in

Objective: This is an introductory course which considers a wide range of topics in

theoretical and empirical issues in contemporary corporate finance. Issues concerning
certain broad topics include capital structure decisions, agency conflicts in the firm,
dividend policy, corporate financing, the market for corporate control, and corporate
governance, among others. The primary focus is on how asymmetric information, agency
conflicts, and incomplete contracting affect corporate financial decision-making. The
course aims to familiarize students with contemporary/influential research, ideas on the
subject. As a possible outcome the course promotes critical ideation for possibly
extending these ideas
Preparation: Students who participate in the course will have to do rigorous reading of
both assigned readings listed in the outline and the additional reading that may be
referred during the course. It is expected that for each session students have to
demonstrate through understanding of the readings. Exceptions are strictly not tolerated.
Seminar Methodology: The course is taught using the seminar method. The students
therefore require to come up with a perspective on an agenda of discussion issues on the
prescribed readings for each session. To aid the discussion the students may use
powerpoint presentations. The instructors of the course would also present a perspective
covering the issues and lead these discussions. The class sessions will be of 90 minutes
each and roughly the discussion opportunities will be distributed equally.
Submissions: The students are expected to write a term paper on a topic during the
course. The term paper is an individual submission. Students are encouraged to start early
on the term paper by taking cues from the course outline to select the topic. The
submission date is 13th December 2013 by 5.30 PM. The expectation from the term paper
is
1) The students should be able to develop a contemporary research review on the
topic
2) The students should be able to present a critical appraisal of the main research
questions, methodology and results thereof highlighting contemporary thinking.
3) The students should be able to generate directions of possible inquiry into the
subject. Original thinking would be appreciated in this regard.

Evaluation
Evaluation Component

Weightage

Class room seminars

20%

Term Paper

30%

Term Examination

50%

Session Plan
Sessio
n
1-2

Topic/ Readings
Empirical Issues of Publicly Traded Firms
Readings:
Roy (1951), Some Thoughts on Distribution of Earnings, Oxford Economic
Papers, Vol 3, pp 135- 146.
Rosenbaum and Rubin (1983), The Central Role of the Propensity Score in
Observational Studies for Causal Effects, Biometrica, Vol 70, pp 41-55.
Dehejia and Wabba (1999), Causal Effect in Non Experimental Studies: Reevaluating the Evaluation of Training Programs Journal of American Statistical
Association, Vol 94, pp 1053-1062.
Puri (1996), Commercial Bank in Investment Banking: Conflict of Interest or
Certification Role, Journal of Financial Economics, Vol 40, pp 373-401.
Fang (2005) Investment Bank Reputation and the Price and Quality of
Underwriting Services, Journal of Finance, VOl 60, pp2729-2761.

3-4

Market Efficiency :EMH, Information Asymmetry and Market Efficiency,

Readings
David K Hirshleifer and A Subramanian (1998) " Investor Psychology and
Security Market Under overreactions Journal of Finance, 53, pp.1839-1885.
Lewellen J and J Shanken (2002)" Learning asset pricing tests and Market
Efficiency Journal of Finance, 57 pp 1113-1145.

Copeland T E and Friedman (1991) " Partial Revelation of Information in

Experimental Asset Markets Journal of Finance, 46, pp 265-295.

5-6

Brennan M and A Kraus (1987) " Efficient Financing under Asymmetric

Information, Journal of Finance, 42, pp 1225-1243.
Empirical Issues of Capital Structure Theory
Readings
Myers and Mjluf (1984) "Corporate financing and Investment Decisions when
firms have information and investors do not have" The Journal of Financial
Economics, 13 197-227.
Leary and Roberts (2008) "The pecking order debt capacity and
information asymmetry" SSRN working paper.
Fama French (2005) "Financing Decisions: Who Issues stock" Journal
Financial Economics, 76 pp 549-582.

7-8

Frank and Goyal (2007) "Capital Structure Decisions: What factors are Reliably
Important?" Working Paper
Empirical Evidence of Dividend Theory
Readings
Kalay Avner Roni Michaely (2000) Dividends and Taxes A Reexamination,
Financial Management, 29 (2).
La porta , Lopez-de Silanes, Shleifer and Vishny (2000) Agency Problem and
the Dividend policy around the World, Journal of Finance, 55, pp 1-33.
Koch and Sun (2004) Dividend Changes and Persistence in Past Earning
Changes, Journal of Finance, 59, pp 2093-2116.

9-10

Share Buybacks & Payout Policy

Readings
Datmar, Amy K (2000), "Why do firms repurchase stock?," The Journal of
Business, 73(3), pp 331-355.
Graham, J & R; Harvey, (2001), The Theory and Practice of Corporate
Finance: Evidence from the Field, Journal of Financial Economics, 60, pp
187-243
Brav, A; Graham, J R; Harvey, C R; & Michaely, R (2005), "Payout policy in
21st century," Journal of Financial Economics, 77, pp 483-527

Nohel, T & Torhan, V (1998), "Share repurchase & firm performance: new
evidence on the agency cost & free cash flow," Journal of Financial
Economics, 49, pp 187-222
Grullan, G & Michaely, R (2004), " The information content of share
repurchase programs," Journal of Finance, 59, pp 651-680

11-12

Guffey, D.M & Schneider, D.K (2004) Financial Characteristics of Firms

Announcing Share Repurchases, Journal of Business and Economic Studies,
10 (2)
Initial Public Offerings and Seasoned Equity Offerings
Readings
Yong Othman, A review of IPO research in Asia: whats next?. Pacific
Basin Finance Journal Vol. 15, (2007), p 253 275.
Ritter .R. Jay and Welch IVO, A Review of IPO Activity, Pricing, and
Allocations, the Journal of Finance, Vol. LVII, No. 4. Aug 2002.
Tim Loughran and Jay Ritter Why Has IPO Underpricing Changed over Time?
Financial Management Vol. 33, No. 3 (Autumn, 2004), pp. 5-37
Michelle Lowry and G. William Schwert IPO Market Cycles: Bubbles or
Sequential Learning, The Journal of FinanceVolume 57, Issue 3,
Anderson, Bread and Born, (1995) Initial Public Offerings: Findings and
Theories, Kulwer Academics, Boston

13-14

Private Equity and Venture Capital

Readings
Chemmanur, T., and Z. Chen, 2002, Angels, Venture Capitalists, and
Entrepreneurs: A Dynamic Model of Private Equity Financing, Boston College
Working paper.
Landier, A., 2002, Start-up Financing: Banks versus Venture Capital, MIT
working paper.
Hellman, T., 2002, A Theory of Strategic Venture Investing, Journal
of Financial Economics 64, 285-314.

15-16

Financial Distress and Debt Restructuring

Readings:
Shleifer and Vishny (1992), Liqudiation Value and Debt Capacity Journal of
Finance, Vol 47, 1343-1366.
Bolton and Scharfstein (1996), Optimal Debt Structure and the Number of
Creditors, Journal of Political Economy, Vol 104, pp1-25
Ebko and Throburn (2003); Control Benefits and CEO Discipline in Automatic
Bankruptcy Auctions Journal of Financial Economics, Vol 69 pp227-258.
Carapeto (2005), Bankruptcy with Outside Options and Strategic Delay,
Journal of Corporate Finance, Vol 11, pp736-746
17-18

Mergers, Acquisitions, Takeovers and Buyouts

Readings
Jensen, Michael C., "Agency Costs of Free Cash Flow, Corporate Finance and
Takeovers," American Economic Review, 76, May 1986, pp. 323-329.
Roll, Richard, "The Hubris Hypothesis of Corporate Takeover," Journal of
Business, 59, April 1986, pp. 197-216.
Andrade, Gregor, Mark Mitchell and Erik Stafford, New Evidence and
Perspectives on Mergers, Journal of Economic Perspectives 15, Spring 2001,
pp. 103-120.
Maksimovic, Vojislav, and Gordon Phillips, The Market for Corporate Assets:
Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?
Journal of Finance 56, December 2001, pp. 2019-2065.
Berkovitch, Elazar, and M. P. Narayanan, "Motives for Takeovers: An Empirical
Investigation," Journal of Financial and Quantitative Analysis, 28, September
1993, pp. 347-362.
Bradley, M., A. Desai, and E. H. Kim, "Synergistic Gains from Corporate
Acquisitions and Their Division Between the Stockholders of Target and
Acquiring Firms," Journal of Financial Economics, 21, 1988, pp. 3-40.

19-20

Corporate Governance
Readings
Jensen, M and W. Meckling (1976) Theory of the Firm: Managerial Behavior,
Agency Costs and Ownership Structure, Journal of Financial Economics, 3,
pp. 305-360.
Shleifer, A. and R. Vishny (1997) A Survey of Corporate Governance,
Journal of Finance, 52, pp. 737-784.
Hart, O and J. Moore (1990) Property Rights And the Nature of the Firm
Journal of Political Economy, 98, pp 1119- 1158

Williamson, Oliver (1988) Corporate finance and Corporate Governance

Journal of Finance, 43, pp 567-592.
Jensen, M. (1993) The Modern Industrial Revolution, Exit, and the Failure of
Internal Control Systems, Journal of Finance, 48 (3), pp. 831-80.