FINA 8322: Ph.D. Seminar in Corporate Finance Spring 2014 Instructor: Christo Pirinsky Class Meets: M 10:00am-12:30pm, DUQ 357 Office: Funger Hall 507 Phone: (202) 994-2377 Office Hrs: W 4:30pm-6:30pm E-mail: pirinsky@gwu.edu Objective and Style: This course covers six major areas in corporate finance concerned with agency theory and corporate governance, asymmetric information, institutions, capital structure, corporate executives, and the boundaries of the firm. The course emphasizes both classical papers and more recent contributions. It represents a mixture of theoretical and empirical papers. Students are expected to be familiar with basic notions in finance, micro-economic theory, and econometrics. The course will emphasize the behavioral aspects of corporate finance. Course Materials: Academic articles. Much of the reading for the course draws on research articles, as indicated in the course outline. The recently published textbook The Theory of Corporate Finance by Jean Tirole (Princeton University Press) provides a useful reference source for the theoretical topics covered in the course. On the empirical side, Counterfactuals and Causal Inference by Stephen Morgan and Christopher Winship (Cambridge) provides useful reference on the topic of causality. The following two review articles are also helpful: Larcker, D. F. and T. O. Rusticus, 2010, On the use of instrumental variables in accounting research, Journal of Accounting and Economics, 186 205. Roberts, M.R. and T. M. Whited, 2011, Endogeneity in Empirical Corporate Finance, working paper, The Wharton School, University of Pennsylvania Structure of the class: Discussion of the new material and the homework assignments (30min.) Presentations (90min.=2x45min.) Concluding remarks (~10min.) Assessment: The assessment for the course will be based on the following scheme: Exams Percent Homework / participation 10% Presentations 30% Final 30% Paper 30% Total 100% Some homework questions will be assigned as we go. They will take the form of a short essay / discussion. Approximately 2 papers (one per person) will be assigned each class for reading and discussion. Students are expected to read the corresponding papers carefully and prepare a 40min. presentation. The presentation needs to summarize the major contribution / results of the paper in a systematic and concise manner. An open discussion will accompany each presentation. 1
Each student is expected to work on a research paper during the semester. The objective of the paper is to help you master the format and style of an academic article as well as two widely used databases in Finance and Economics. I don t expect novel contributions to the literature. The paper needs to be based on the Compustat (merged) / CRSP databases, accessible through WRDS. A completed draft of the paper needs to be submitted by the end of the semester. The paper has to be around 20 pages long, including 3 tables and a short reference list. The title of the paper should read Firm Leverage and. You can fill in the blank space as you wish, depending on your interests. For example, if you are interested in innovations, you could choose a title Firm Leverage and Research and Development. The paper needs to have 5 sections: Introduction (3 pages), Hypothesis (2pages), Data description (2 pages), Results (7 pages), Conclusion (1 page). The paper needs to construct a set of accounting and stock price performance measures (e.g. annual returns) for all Compustat firms over the 1990-2010 period. The measures need to include some welldefined leverage ratios as well as some proxies of the concept you would like to relate to leverage. Table 1 needs to include summary statistics of all variables. All subsequent tables should have the results. 2
Readings: 1. Agency Theory of the Firm Tirole, Jean (2006): The Theory of Corporate Finance, chapter 3, 4, 5 [1.1] Jensen and Meckling, 1976, Theory of the Firm, Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics 3, 305-360. [2.1] Jensen, M., 1986, Agency Costs of Free Cash Flow, Corporate Finance and Takeovers, American Economic Review 76, 323-329. [2.2] Jensen, M., 2004, The agency costs of overvalued equity and the current state of corporate finance." European Financial Management 10, 549-565. [2.3] Stulz, R., 1990, Managerial discretion and optimal financial policies, Journal of Financial Economics 26, 3 27. [3.1] Bhide, Amar, 1993, The Hidden Costs of Stock Market Liquidity, Journal of Financial Economics, 34:31-51. [3.2] Fang, V., X. Tian, and S. Tice, 2014, Does stock liquidity enhance or impede innovation? Journal of Finance, forthcoming. [4.1] Nenova, T., 2003. The value of corporate voting rights and control: A cross-country analysis. Journal of Financial Economics 68, 325 351. [4.2] Dyck, A. and L. Zingales, 2004, Private benefits of control: An international comparison, Journal of Finance, 537-600. [4.3] Kalay, A., O. Karakas, and S. Pant, 2014, The market value of corporate votes: Theory and evidence from option prices, Journal of Finance, forthcoming. [5.1] Demsetz, H., Lehn, K., 1985, The structure of corporate ownership: causes and consequences, Journal of Political Economy 93, 1155 1177. [5.2] Gompers, P., J. Ishii, and A. Metrick, 2003, Corporate Governance and Equity Prices, Quarterly Journal of Economics 118, 107 55. [5.3] Smith, E, 2013, Do shareholders want less governance, Working paper, University of Rochester [6.1] Black, B., and W. Kim., 2011, The effect of board structure on firm value: a multiple identification strategies approach using Korean data, Journal of Financial Economics, forthcoming. [6.2] Bennedsen, M., K. Nielsen, F. Perez-Gonzalez, and D. Wolfenzon, 2007, Inside the family firm: The role of families in succession decisions and performance, Quarterly Journal of Economics, 647-691. [6.3] Brav, A., W. Jiang, F. Partnoy, and R. Thomas. 2008. Hedge Fund Activism, Corporate Governance, and Firm Performance, Journal of Finance 63, 1729-1775. [7.1] Roll, Richard, 1986, The Hubris Hypothesis of Corporate Takeovers. Journal of Business 59, 197 216. [7.2] Grossman, Sanford, and Oliver Hart, 1980, Takeover Bids, the Free-Rider Problem and the Theory of the Corporation, Bell Journal of Economics 11, 42-64. [7.3] Bertrand, Marianne, and Sendhil Mullainathan, 2003, Enjoying the quiet life: Managerial behavior following anti-takeover legislation, Journal of Political Economy 111, 1043-1075. Holmström, Bengt, and Jean Tirole, 1993, Market Liquidity and Performance Monitoring, Journal of Political Economy 101, 710-740. 3
Zingales, Luigi, 1995, What determines the value of corporate votes? Quarterly Journal of Economics 110, 1047 1073. Jensen, M., 2007, The Agency Cost of Overvalued Equity, working paper Shleifer, Andrei, and Vishny, Robert W, 1997, A Survey of Corporate Governance. Journal of Finance 52, 737 83. 2. Asymmetric Information Tirole, Jean (2006): The Theory of Corporate Finance, chapter 6 [8.1] Myers S., 1977, The Determinants of Corporate Borrowing, Journal of Financial Economics 5, 17-175 [8.2] Leland and Pyle, 1977, Information Asymmetries, Financial Structure and Financial Intermediation, Journal of Finance 32, 371-388. [8.3] Myers S. and Majluf,1984, Corporate Financing and Investment Decisions when Firms have Information that Investors do not have, Journal of Financial Economics 13, 187-221. [8.4] Frank, Murray Z., and Vidhan K. Goyal, 2003, Testing the pecking order theory of capital structure, Journal of Financial Economics 67, 217-248. Ross S., 1977, The determination of financial structure: the incentive-signaling approach, Bell Journal of Economics 8, 23-40. 3. Institutions and the Firm [9.1] La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, 1998, Law and Finance, Journal of Political Economy, 1113-1155. [9.2] Alesina, A., and P. Giuliano. 2013. Culture and Institutions. Working paper, Harvard University and UCLA. [9.3] Guiso, Luigi, Paola Sapienza and Luigi Zingales, 2004, The Role of Social Capital in Financial Development, The American Economic Review, 94(3), pp. 526-556. Guiso, L., P. Sapienza, and L. Zingales, 2008, Trusting the Stock Market. Journal of Finance 63, 2557-2600. Knack, Stephen and Philip Keefer, 1996, Does social capital have an economic payoff?: A cross-country investigation, The Quarterly Journal of Economics, 112(4), pp. 1251. Philippon, Thomas, and Ariell Reshef. 2012. Wages and Human Capital in the US Finance Industry:1909 2006." The Quarterly Journal of Economics 127, 1551-1609. Philippon, Thomas, and Ariell Reshef. "An International Look at the Growth of Modern Finance." The Journal of Economic Perspectives 27.2 (2013): 73-96. Gennaioli, Nicola, Andrei Shleifer, and Robert W. Vishny. 2014. Finance and the Preservation of Wealth. No. w19117. National Bureau of Economic Research. 4
4. Capital Structure Tirole, Jean (2006): The Theory of Corporate Finance, chapter 3, 4, 5 and 6 [10.1] Rajan and Zingales, 1995, What do we know about capital structure? Some evidence from international data, Journal of Finance 50, 1421-1460. [10.2] Chevalier, Judy, 1995, Capital Structure and product-market competition: empirical evidence from the supermarket industry, American Economic Review 58, 415-435. [10.3] Graham, John, Mark Leary, and Michael Roberts, 2014, A Century of Capital Structure: The Leveraging of Corporate America, Working Paper. [11.1] Opler, Tim, Lee Pinkowitz, Rene Stulz, and Rohan Williamson, 1999, The determinants and implications of corporate cash holdings, Journal of Financial Economics 52, 3-46. [11.2] Dittmar, A., Mahrt-Smith, J., 2007. Corporate governance and the value of cash holdings. Journal of Financial Economics 83, 599 634. Lang, Larry H., Eli Ofek, and Rene M. Stulz, 1996, Leverage, investment, and firm growth, Journal of Financial Economics 40, 3 29. Butler, A., and J. Cornaggia, 2011, Does access to external finance improve productivity? Evidence from a natural experiment, Journal of Financial Economics, 184-203. Titman, Sheridan, 1984, The effect of capital structure on a firm's liquidation decision, Journal of Financial Economics 13, 137-151. Shyam-Sunder and Myers, 1999, Testing static trade-off against pecking order models of capital structure, Journal of Financial Economics 51, 219-244. Welch, Ivo, 2004, Capital Structure and Stock Returns, Journal of Political Economy 112, 106-131 Leary, M. and M. Roberts, 2005, Do firms rebalance their capital structures? Journal of Finance 60, 2575 2620. Bates, T., K. Kahle, and R. Stulz, 2009, Why Do U.S. Firms Hold so Much More Cash Than They Used To? Journal of Finance 64, 1985-2021. Frésard, L., 2009, Financial strength and product market behavior: The real effects of corporate cash holdings, Journal of Finance, forthcoming 5. Executives and the Firm [12.1] Bertrand, M. and Schoar, A., 2003, Managing with Style: The Effect of Managers on Firm Policies, Quarterly Journal of Economics,1169-1208. [12.2] Malmendier, U., G. Tate. 2005. CEO overconfidence and corporate investment. J. Finance 60 2661 2700. Cronqvist H., A. Makhija, and S. Yonker, 2012, Behavioral Consistency in Corporate Finance: CEO Personal and Corporate Leverage, Journal of Financial Economics 103, 20-40. Frydman, Cary, Nicholas Barberis, Colin Camerer, Peter Bossaerts, and Antonio Rangel, 2014, Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility, Journal of Finance, forthcoming. 6. Boundaries of the Firm Tirole, Jean (2006): The Theory of Corporate Finance, chapter 7, 8, and 10 5
[13.1] Andrade, Gregor; Mitchell, Mark and Stafford, Erik. New Evidence and Perspective on Mergers. Journal of Economic Perspectives, Spring 2001, 15(2), pp. 103 20. [13.2] Jovanovic, B., Braguinsky, S., 2004. Bidder discounts and target premia in takeovers. American Economic Review 94, 45 56. [14.1] Berger, Philip G. and Eli Ofek, 1995, Diversification s effect on firm value, Journal of Financial Economics, 39-65. [14.2] Schoar, Antoinette, 2002, The Effect of Diversification on Firm Productivity, Journal of Finance 57, 2379-2403. Roll, Richard. The Hubris Hypothesis of Corporate Takeovers. Journal of Business, April 1986, 59(2), pp. 197 216. Harford, Jarrad, 2005, What drives merger waves? Journal of Financial Economics 57, 2379-2403. Shin, H. and Rene Stulz, 1997, Are Internal Capital Markets Efficient, Quarterly Journal of Economics 113, 531-552. Williamson, O.E., 1973, Markets and hierarchies: some elementary considerations, The American Economic Review 63, 316 325 Alchian, A.A. and Demsetz, H., 1972, Production, information costs, and economic organization, The American Economic Review 62, 777 795. Donaldson, T. and Preston, L.E., 1995, The stakeholder theory of the corporation: Concepts, evidence, and implications, The Academy of Management Review 1, 65-91. Grossman, Sanford, and Oliver Hart, 1986, The costs and benefits of ownership: A theory of vertical and lateral integration, Journal of Political Economy 94, 691-719. Rajan, Raghuram G., and Luigi Zingales, 1998, Power in a Theory of the Firm, Quarterly Journal of Economics 113, 387-432. Coase, Ronald, 1937, The nature of the firm, Economica 4, 386-405. Coase, Ronald, 1960, The problem of social cost, Journal of Law and Economics 3, 1-44. Lamont, Owen, 1997, Cash Flow and Investment: Evidence from Internal Capital Markets, Journal of Finance 52, 83-109. Jensen, M., 2002, Value maximization, stakeholder theory, and the corporate objective function, Business Ethics Quarterly 12, 235-256. Diamond, Douglas W., 1984, Financial Intermediation and Delegated Monitoring, Review of Economic Studies 51, 393-414. Hart, Oliver, and John Moore, 1990, Property rights and the nature of the firm, Journal of Political Economy 98, 1119-1158. Aghion, Philippe, and Patrick Bolton 1992, An Incomplete Contracts Approach to Financial Contracting, Review of Economic Studies 77, 473-494. Sundaram, A.K. and Inkpen, A.C., 2004, The corporate objective revisited, Organization Science 15, 350-363. Allen, F. and Carletti, E. and Marquez, R., 2008, Stakeholder capitalism, corporate governance and firm value, Working paper, University of Pennsylvania Rajan, Raghuram G., and Luigi Zingales, 1998, Power in a theory of the firm, Quarterly Journal of Economics 113, 387-432. 6
Kaplan, Steven N., and Per Stromberg, 2002, Financial Contracting Theory meets the Real World: An Empirical Analysis of Venture Capital Contracts, Review of Economic Studies. Diamond, D. and P. Dybvig, 1983, Bank Runs, Deposit Insurance and Liquidity, Journal of Political Economy 91, 401-19. Gorton, Gary, and George Pennacchi, 1990, Financial Intermediaries and Liquidity Creation, Journal of Finance 45, 407-443. Allen, Franklin and Douglas Gale, 1997, Financial Markets, Intermediaries, and Intertemporal Smoothing, Journal of Political Economy 105, 523-546. Allen, Franklin and Douglas Gale, 1998, Optimal Financial Crises, Journal of Finance 53, 1245-1284 Diamond, Doug and Raghuram Rajan, 2001, Liquidity Risk, liquidity creation and Financial Fragility: A Theory of Banking, Journal of Political Economy 109, 289-327. 7
TENTATIVE COURSE OUTLINE Date(s) Week Topic Aug 25 1 Course Overview; Financial Research Databases Sep 8 2 Agency Theory and Corporate Governance Sep 15 3 Agency Theory and Corporate Governance Sep 22 4 Agency Theory and Corporate Governance Sep 29 5 Agency Theory and Corporate Governance Oct. 6 6 Agency Theory and Corporate Governance Oct. 13 7 Agency Theory and Corporate Governance Oct. 20 8 Asymmetric Information Oct. 27 9 Institutions and the Firm Nov 3 10 Capital Structure Nov 10 11 Capital Structure Nov 17 12 Executives and the Firm Nov 24 13 Boundaries of the Firm Dec 1 14 Boundaries of the Firm 8