Introduction

MSCA 623: Financial Theory and Corporate Policy

Welcome to the MSCA 623 home page

Instructor: Nilanjan Basu, Ph.D., CFA

Office: GM 300 - 89
Phone: (514) 848 2424 x 2913
E-Mail: nbasu@jmsb.concordia.ca
Office Hours: By appointment

Course description:

The objective of this course is to introduce the student to research in corporate finance. As future researchers and analysts,
you will be required to develop the following skills:

● A familiarity with the current research in corporate finance

● An ability to organise and analyse data
● An ability to work with datasets frequently used in corporate finance

The first (and primary) objective of introducing you to the existing research in corporate finance will be achieved primarily
through directed reading of research papers. This website has a week by week outline providing the references for specific
papers that we will cover in class.

The second objective of introducing you to the analysis of data will be achieved through assignments that you will work on
during the semester.

If you are considering this course, take a moment to go through these web pages to get an idea of what all will be required in
this course.

Course requirements:

There are no required texts for this course. All your reading assignments will be of research papers. However, the following
books are useful as supplementary references.

● Financial Theory and Corporate Policy by Thomas E. Copeland, J. Fred Weston and Kuldeep Shastri.
Pearson Addison Wesley Publishing Co. ISBN: 0-321-12721-8

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 Introduction

● Advanced Corporate Finance by Joseph P. Ogden, Frank C. Jen and Philip F. O'Connor. Prentice Hall
Publishing. ISBN: 0-13-091568-8

In order to access many of the research papers, you may find it useful to go through one of these sources:

● www.ssrn.com - This is a website with listings of working papers and a very good place to get hold of papers that are
as yet unpublished. This can be accessed from any computed with an internet connection.
● www.jstor.org - If you using a university computer you will automatically be authorized to access papers. If not you
may have to go through the Concordia library website (see below)
● http://clues.concordia.ca/ is the Concordia library website that you will find very helpful. You can search for the
journal or database that you need within this website. Once again, if you wish to access this resource when not
logged in to the university network, you will need your student ID number.

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 Course policies

MSCA 623: Financial Theory and Corporate Policy

Course Administration

Grading

Your final course grade will be based on the following components:

Take Home Final Exam: 40%

Compustat assignment: 5%
Term paper: 25%
Class participation (class discussion and paper presentation):20%
Paper critique: 10%

The nature of the assessment is such that you will get almost all the formal feedback in this course right at the end. In order
to avoid any problems with this you are encouraged to meet the instructor as soon as you have some work done on your term
paper or paper to critique. This will serve two purposes. First, you will get a better idea of how you are doing in the course.
Second, you will get a chance to review your work and improve it before submitting it for a grade.

Details of assessment:

● The final exam will test you on the following issues:

❍ Understanding of the issues we have discussed through the semester

❍ Ability to incorporate new research material (i.e. research papers not assigned in this course) in your

analysis of specific research issues

❍ Ability to do basic data analysis similar to what you have done for the Compustat assignment

● Class participation refers to your active participation in the course throughout the semester. It will be assessed by:
❍ You will be required to present one of the assigned papers for the semester. The assessment will be of the

quality of your presentation in terms of clarity, understanding and the level of detail at which you explore the
issues.
❍ For most classes, we will discuss a few assigned research papers. You are expected to carefully read all the

papers prior to the class and actively participate in the class discussion.
● The details on the remaining three parts of your assessment are provided on the "Projects" page.

Office hours

Office hours for this course are by appointment only. My schedule for this semester is fairly flexible and you are encouraged

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 Course policies

to email me (preferred) or call me to set up a time whenever you need to meet.

Work load

Many of you may not have taken a research seminar before this. In that case, please be prepared for a heavy workload. As
we go through the semester, you will become more used to the process of research and the weekly readings and
presentations will be more manageable. On average, I would recommend that you plan for about 15 hours of work outside the
classroom for each classroom session.

Further information

I will use the FirstClass message board to make any further announcements, provide reading material and in general to
conduct much of the routine administration of this course. You are required to check these messages at least once a week,
preferably more often.

Academic integrity statement

Academic Integrity: The Code of Conduct (Academic) at Concordia University states that the “integrity of University academic
life and of the degrees, diplomas and certificates the University confers is dependent upon the honesty and soundness of the
instructor-student learning relationship and, in particular, that of the evaluation process. As such, all students are expected to
be honest in all of their academic endeavors and relationships with the University.” (Undergraduate Calendar, section 16.3.14
or Graduate Calendar 2005-2006, page 667). All students enrolled at Concordia are expected to familiarize themselves with
the contents of this Code. You are strongly encouraged to visit the following web address http://johnmolson.Concordia.ca/
ugrad/codeofconduct.pdf which provides useful information about proper academic conduct.

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 Course syllabus

MSCA 623: Financial Theory and Corporate Policy

Course schedule

The coverage below is an intended one. Depending on the progress we make through the term we may end up covering all or
parts of it.

Week 1: September 4

Topics:

Introduction

● Scope of the course, objectives of the course

● "Pre-requisites" - statistical tools, basic finance, basic accounting

Discussion of the first project

● The Compustat database

● Using SAS

Paper presentation schedule

Read:
CIT's notes on using SAS available at:
http://johnmolson.concordia.ca/cit/technotes.cfm?note=sas.cfm#notes

Week 2: September 11

Topics:
Methodology:

● Tobin's Q (class discussion)

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 Course syllabus

● Matched samples
● Event studies

Read:
Barber, Brad M. and John D. Lyon, 1996, Detecting abnormal operating performance: The empirical power and specification
of test statistics, Journal of Financial Economics 41, 359-399

Kothari, S. P. and Jerold B. Warner, 2004, Econometrics of Event Studies, Tuck School of Business Working Paper (made
available for download).

Week 3: September 18

Topics:
Capital Structure

Read:
Handout: excerpt from Ross, Westerfield, Jaffe, and Roberts, Corporate Finance, Fourth Canadian Edition, McGraw Hill
Ryerson, 2005.

Myers, S. C., 1977, The determinants of corporate borrowings, Journal of Financial Economics 5, 147 - 175.

Miller, M. H., 1977, Debt and Taxes, Journal of Finance 32(2), 261-275.

Week 4: September 25

Topics:
Capital Structure, agency costs and equity financing

Read:
Myers, S. C. and N. S. Majluf, 1984, Corporate finance and investment decisions when firms have information that investors
do not have, Journal of Financial Economics 13, 187 - 221.

Jensen, M. C. and W. H. Meckling, 1976, Theory of the firm: Managerial behavior, agency costs and ownership structure,
Journal of Financial Economics 3, 305 - 360.

Shyam-Sunder, L. and S. C. Myers, 1999, Testing static-tradeoff against pecking order models of capital structure. Journal
of Financial Economics 51(2), 219 - 244.

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 Course syllabus

Week 5: October 2

Topics:
Capital Structure

Read:
Rajan, R. G. and L. Zingales, 1995, What do we know about capital structure? Some evidence from international data,
Journal of Finance 50, 1421-1460.

Frank, M. Z. and V. K. Goyal, 2003, Testing the pecking order theory of capital structure, Journal of Financial
Economics 67, 217-248.

Week 6: October 9

Topics:
Payout policy

Read:
Easterbrook, F. H. 1984, Two agency-cost explanations of dividends, The American Economic Review 74(4), 650-659.

La Porta, R., F. Lopez-de-Silanes, A. Shleifer and R. Vishny, 2000, Agency problems and dividend policies around the world,
Journal of Finance 55(1), 1-33.

Fama, E. F. and K. R. French, 2001, Disappearing dividends: changing firm characteristics or lower propensity to pay?
Journal of Financial Economics 60, 3 - 43

Week 7: October 16

Topics:
Payout policy

Read:
Lie, E. and J. J. McConnell, 1998, Earnings signals in fixed price and Dutch auction self-tender offers, Journal of
Financial Economics 49(2), 161 - 186.

Jagannathan M., C. P. Stephens and M. S. Weisbach, 2000, Financial flexibility and the choice between dividends and stock
repurchases, Journal of Financial Economics 49(2), 355 - 384.

Dittmar, Amy, 2000, Why do firms repurchase stock?, Journal of Business 73(3), 331-355.

Brav, A., J. R. Graham, C. R. Harvey, R. Michaely, 2005, Payout policy in the 21st century, Journal of Financial

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 Course syllabus

Economics 77, 483 - 527

Week 8: October 23

Topics:
Raising funds: equity

Read:
Rock, Kevin, 1986, Why new issues are underpriced, Journal of Financial Economics 15, 187-212.

Loughran, T. and J. R. Ritter, 1995, The new issues puzzle, Journal of Finance 50, 23-51.

Baker, M. and J. Wurgler, 2002, Market timing and capital structure, Journal of Finance 57(1), 1-32.

Week 9: October 30

Topics:
Raising funds: equity and debt

Read:
Loughran, T. and J. R. Ritter, 1997, The operating performance of firms conducting seasoned equity offerings, Journal of
Finance 52, 1823-1850.

Rangan, S, 1998, Earnings management and the performance of seasoned equity offerings, Journal of Financial
Economics 50, 101-122.

Krishnaswami, S., P. Spindt and V. Subramaniam, 1999, Information asymmetry, monitoring, and the placement structure of
corporate debt, Journal of Financial Economics 51, 407-434.

Week 10: November 6

Topics:
Internal capital markets and diversification

Read:
Stein, J. C., 1997, Internal capital markets and the competition for corporate resources, Journal of Finance 52, 111-134.

Scharfstein, D. S. and J. C. Stein, 2000, The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient
Investment, Journal of Finance 55(6), 2537-2564.

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Berger, P. and E. Ofek, 1995, Diversification's effect on firm value, Journal of Financial Economics 37, 39-65.

Week 11: November 13

Topics:
Reversing diversification

Read:
Daley L., V. Mehrotra, R. Sivakumar, 1997, Corporate focus and value creation Evidence from spinoffs, Journal of
Financial Economics 45(2), 257-281.

Powers, E., 2001, Spinoffs, Selloffs and Equity Carveouts: An Analysis of Divestiture Method Choice. Available at SSRN:
http://ssrn.com/abstract=257600

Week 12: November 20

Topics:
Final exam: The class session will be a short one for this week. It will be devoted to:

● A review of the material covered till now

● An explanation of the exam and the related datasets.

Final week: November 27 / November 29 / November 30

Topics:
Student presentations

Final dates will be decided within the first two weeks of class.

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 Project information

MSCA 623: Financial theory and Corporate Policy

Assignments

Assignment 1: Working with Standard and Poor's Compustat

Group project, no maximum group size
Course weight of 5% (read the description below for more details)
Date due: Before the final exam is assigned

The objective of this assignment is to introduce you to the S&P Compustat database and have you work through some
standard data management tasks using this data.

Please note:

1. The data and programs that you will prepare in this assignment will be required to solve a significant part of the exam for
this course. So please make sure that you have this assignment done and ready before the exam.

2. A working knowledge of the SAS software (recommended) or any other data management software is required for this
assignment. We will discuss software issues briefly in class and I will provide you with some sample SAS code. However, you
may need to contact me outside class hours if you are having trouble with the software. If you choose to work with another
package (e.g. MS Access) you will need to make sure that you are able to:

● read the data into your preferred software

● "clean up" the data as required
● import it from the data management software to a statistical software package (Stata, SPSS etc.) and run the
relevant statistical tests on it

Tasks:

1. Using the Research Insight database, download Compustat data for all firms for the years 1999 - 2003. The data variables
will be provided to you but the list will be fairly long and will include many of the available fields. If you are able to get started
early on this, you are strongly encouraged to download all income statement and balance sheet items along with the firm
identifier (CUSIP) and year.

2. Read the data into SAS (from here on I will use SAS to refer to the data management software / statistical software). Clean
up the data if required.

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3. Match the sample data I provide to the existing Compustat data to obtain the firm characteristics of the sample.

4. Create a matched sample for the sample provided. Although this process can be done in several ways, for the purposes of
this assignment I will ask you to match each firm in the sample to exactly one firm not in the sample.

5. Test if

● the operating performance of the sample changed from 1999 to 2002

● The adjusted operating performance of the sample firms changed from 1999 - 2002

Administrative Notes

This is a group assignment - you can work on your own or with other students in the class - and there are no restrictions on
group size. Therefore it is permitted for the entire class to work together on this (i.e. if you choose to form a group that
includes the entire class). However, please note that the knowledge of this project will be required to complete the exam (a
strictly individual effort) and therefore it is your responsibility to acquire the knowledge and skills to complete all of this on your
own.

Assignment 2: Referee report / critique

Individual effort
Course weight 10%
Date due: On or before the last day of classes

The objective of this assignment is to develop you ability to understand the work of the other researchers and then to identify
shortcomings / suggest improvements.

To facilitate this assignment, we will divide research in corporate finance into the following broad classifications:

● Capital structure, payout policy

● Principal-agent problems and issues in corporate governance
● Mergers and acquisitions, corporate diversification and refocusing
● Raising capital (IPO and SEO), choice of bank debt and public debt

By the fourth week of classes, you will be required to choose one of these areas. I will choose a working paper in that area for
you and you will be required to critique that paper. You will be required to submit a summary report (2 - 5 pages) that should
include:

● identification of areas where the research could be strengthened / has weaknesses

● suggestions to improve the paper

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Assignment 3: Term paper

Group effort - maximum group size of 3 (this number will be reviewed at the start of the course
and may be modified depending on enrollment)
Course weight 25%
Date due: On or before the last day of classes

The objective of this assignment is to develop your own research interests

You will be required to choose any area in corporate finance and:

● complete an in-depth literature review (survey between 20 - 40 papers) - this is the minimum requirement for this
project
● develop potential research questions in this area (highly desirable)
● run preliminary empirical tests of your hypotheses / develop the outlines of a theoretical model (properly done, this
would make it an excellent effort)

Administrative Notes

You will be required to check the area of interest with me. If more than one group wishes to work on the same area of
research, I will put a much more emphasis on the groups developing separate and meaningful research questions (in other
words the assignment gets more difficult). At the same time, in this situation, you are permitted to discuss your literature
review with the other group (s). You still have to submit separate reports.

Note that you have two distinct projects to work on through the semester. It is very strongly recommended that you complete
and submit one of them well in advance (typically before the exam). Attempting to finish both of them in the two weeks after
the final exam may result in a stressful and unpleasant experience.

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