This course is intended to enable participants to understand and conduct research in some selected areas of corporate finance. It is taught at a first-year doctoral level and combines two objectives. Firstly, participants learn some of the classic contributions to the theory of modern corporate finance and understand the main contributions in the respective area. Secondly, the course also introduces some of the main empirical contributions to the field and studies the main econometric and statistical techniques used in corporate finance.
1. What is "Corporate Finance"?
Most basically, corporate finance addresses the questions how companies raise financing and structure their liabilities. The major areas of research addressed in this course are:
- Capital structure: how do companies choose between different types of securities, particularly debt and equity?
- Security design: How do companies design liabilities (e. g. maturity and seniority of debt claims, call and conversion provisions)
- Corporate payout policy: How much do companies pay out to investors as dividends?
- The corporation in primary markets: why do companies go public, and why are initial public offerings (IPOs) generally underpriced?
- Ownership rights: how are control rights (e. g. voting rights, liquidation rights) assigned to security holders? When are these rights contingent?
- Mergers and acquisition and the market for corporate control: What determines the boundaries of the company? What are the costs and benefits of concentrated ownership? How is corporate control exercised?
Note that the emphasis here is on positive, not on normative questions. The research discussed here generally aims at understanding observed corporate financial policies, and market price responses to these decisions.
2. Format and Scope of the Course
Each session covers one key area of corporate finance. We will cover the main theoretical papers as well as some important empirical applications. Usually, I will give a presentation of the key theoretical paper(s) for each session. I will ask participants to volunteer for presenting some of the other papers.
Everybody who wishes to complete a PhD in Finance should read the "Classics" in the theory of corporate finance. These articles are usually widely cited and started completely new areas of research. All modern research and academic discussion assume familiarity with these contributions. Unfortunately, those papers that are path breaking in terms of ideas are not always those that contain the most general or rigorous statement of a particular result. In some cases, the results stated in a fundamental paper are solely based on a numerical example, in others the statement or proof is incomplete or plainly incorrect. Hence, on several occasions we will discuss those papers during the lectures that state a certain result more generally or carefully or restate older results in the context of modern methodology. For this reason some of the papers above will be mentioned only in passing during the lectures. However, this should not lead anybody to believe that they are not worth reading. Several of these papers contain stimulating ideas and original thoughts that were lost in the reception and re-discovering those is sometimes a valuable stimulus for formulating new research ideas.
Most of the published papers in Corporate Finance in are empirical and it is therefore important to connect theoretical research with empirical applications. For this reason, each session will combine theoretical and empirical contributions. As with the theoretical contributions, we will be introduced to classics as well as to new research. However, the selection of the empirical papers puts a stronger emphasis on exemplifying methodologies and introducing particular econometric techniques.
The last (but not least important) objective of the course is to give students some feel for the more recent research in the field. Hence, we shall discuss some working papers and recently published research that addresses new question or opens up new perspectives. The selection of these papers is naturally the most subjective and reflects personal tastes. Here we enter the current discussion, where the dust has not yet settled.
3. What the course does not
The focus is necessarily narrow, and some important areas of the subject are excluded. We shall not address the following:
- Transaction costs and taxes; we shall mention this only in passing, although the subject is certainly important.
- Real investment decisions. We shall say little about corporate investment decisions and exclude the important (and growing) area of real option analysis.
- Financial intermediation; corporate finance in a broader context includes the analysis of banks, investment banks, and the price setting on exchanges. We shall bypass this area altogether.
Moreover, the focus of the course is on research. While we will also touch on some institutional aspects of the subject as well, these will remain on the sidelines. Students are strongly encouraged to complement the course and familiarize themselves with some institutional and legal details, results in empirical research and case studies. Indications for further reading are given throughout. Those who have not already done so as part of their Bachelor or Master courses are strongly advised to consult MBA-level textbooks (e.g., the textbooks by Brealey, Myers, Allen, Berk and DeMarzo, or Grinblatt and Titman).
The most appropriate preparation for this course are: (1) a first-year doctoral level course in microeconomics that covers game theory and information economics (signaling, adverse selection, equilibrium refinements); (2) a first-year doctoral level course in econometrics that covers estimation and testing theory (e.g., at the level of Greene, Econometric Analysis). Some familiarity with corporate finance and financial institutions at the level of a master's level course is also assumed, but not essential. If you have no prior knowledge of corporate finance, then some chapters in an MBA-level textbook (e.g. Brealey, Myers, and Allen, Principles of Corporate Finance, 10th edition, McGraw Hill 2011; Berk and DeMarzo, Corporate Finance, Pearson 2008) would be useful.
5. Textbooks and readings
There is no general textbook that covers the material in this course. A good book on the theory of corporate finance is:
Tirole, Jean: The Theory of Corporate Finance, Princeton University Press, Princeton 2006
However, Tirole’s book organizes the material by theoretical theme and not by application. The text is therefore not used for the assigned readings here as the course is organized by applications with a strong perspective on empirical tests of corporate financial theory. Another text is:
de Matos, Joao Amaro, 2001,Theoretical Foundations of Corporate Finance, Princeton. Oxford (Princeton University Press)
This book is organized by applications and therefore somewhat closer to the structure of this course. In the final conclusion you need to be able to read and comment on the original papers and not just on the condensed discussion in textbooks, but you may find textbook discussions useful to guide your study.
For each session I assign one or two papers as required reading. I expect all participants to carefully read these papers before class. In addition, there are several papers for further reading. These papers will all play a role in class and the more of them you can read the better. The summary for each session puts these papers into the context of the discussion. I will ask participants to present 2-3 papers from the further reading section throughout the course. Assignments of papers will be discussed in the first class.
Grading is based on paper presentations (25%), and a take-home exam at the end of the course (75%). Depending on the number of participants, you are asked to make about two 20-minute presentations of papers and to contribute to specific questions in class. The papers selected for presentation are listed in the presentation schedule at the end of this document. Please return this sheet by email to my secretary at firstname.lastname@example.org no later than Thursday, February 13, 2020 and list at least five papers in the order of priority. Papers will then be allocated shortly after and your preferences will be considered as much as possible. Please take note of the presentation guidelines with some dos and don’ts for good presentations. The class participation grade depends on the extent to which you have covered the required readings.
At the end of the course there will be a 24h take-home exam. You will be given two papers (most likely recently circulated working papers) and you will have to write a referee report. The instructions for this exam are as follows:
Your report should be a maximum of 1.200 words in length. Of these the summary of the paper should be a maximum of 150 words. Please conclude your report with a final recommendation to the editor of the journal. For this recommendation, assume that the journal is one of the major finance journals (JoF, JFE, RFS).
Start of exam: June 2, 2020 – 10 am
Finish: June 3, 2020 – 10 am
The papers and further details will be handed out with the exam. You can download the take home exam here on the day of the exam:
The course has six sessions. Each session lasts from 8:30am to about 12:30pm and takes place in room R4.09 (fourth floor) in L9, 1-2. Each session will have a presentation by the instructor, mostly on the relevant theory, and two presentations of about 20 minutes each by students, mostly on empirical subjects.
Each section below has an extensive list of readings. Some of these readings are marked as follows:
(R) Required readings, paper will be mentioned or discussed extensively in class and students are expected to read it.
(C) Classic. Every finance student should have read this already. These are papers that are foundational for the field, widely cited, but rarely read properly.
(P) Presentations. These papers will be presented by students in class.
All other papers: Useful, must-read for those who want to do research in this area. Students should pick papers from this list according to their interests. Having an extensive background in a field helps with the takehome exam.
Syllabus, schedule, and readings
General Readings on Methodology
Angrist, Joshua David, and Jörn-Steffen Pischke, 2009, Mostly harmless econometrics : an empiricist's companion (Princeton University Press, Princeton, NJ)
Atanasov, Vladimir A, and Bernard S Black, 2015, The Trouble with Instruments: Re-Examining Shock-Based IV Designs, Northwestern Law & Econ Research Paper 15-09
Gormley, Todd A., and David A. Matsa, 2014, Common Errors: How to (and Not to) Control for Unobserved Heterogeneity, Review of Financial Studies 27:2, 617-661
Hennessy, Christopher A., and Ilya A. Strebulaev, 2015, Natural Experiment Policy Evaluation: A Critique, National Bureau of Economic Research Working Paper Series No. 20978
Imbens, Guido W., and Jeffrey M. Wooldridge, 2007, What's New in Econometrics?, Lecture Notes, NBER Summer Institute 2007
Petersen, Mitchell A., 2009, Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches, Review of Financial Studies 22:1, 435-480
Roberts, Michael, and Toni Whited, 2012, Endogeneity in Empirical Corporate Finance; forthcoming in: George Constantinides, Milton Harris, and Rene Stulz, eds: Handbook of the Economics of Finance, Volume 2A (North Holland, Oxford and Amsterdam)
Wintoki, M. Babajide, James S. Linck, and Jeffry M. Netter, 2012, Endogeneity and the dynamics of internal corporate governance, Journal of Financial Economics 105:3, 581-606
Wooldridge, Jeffrey M., 2010, Econometric analysis of cross section and panel data (MIT Press, Cambridge, Mass.)
Session 1 (February 28, 2020): Capital structure
We will look at several theories of capital structure, beginning with a basic restatement of the Modigliani-Miller theorems. Familiarity with the subject at the masters or MBA-level (Trade-off theory, Modigliani-Miller, APV-model) is presumed here. We will start with a generalized statement of the Modigliani-Miller theorem of capital structure irrelevance (Hellwig 1981). The two main contenders in the capital structure debate to this day are the pecking order theory and the trade-off theory. The pecking-order theory was first formulated by Myers and Majluf (1984) and later put into a coherent game theoretic framework by Noe (1988)). It is based on adverse selection arguments. The trade-off theory was first formulated by Kraus and Litzenberger (1973) and is based on the notion that companies choose the optimal trade-off of tax savings and the costs of financial distress. Later, dynamic versions of this theory differ from the original formulation in important aspects (Leland 1994). This theory underlies all textbook formulations of the adjusted present value approach. In addition, we will look at agency-theoretic arguments and the notion of strategic debt service (Anderson and Sundaresan 1996) and leverage policy in industry equilibrium (Maksimovic and Zechner 1991). We will discuss the empirical challenges faced by these models, discuss identification issues and the power of empirical tests to distinguish the main theories.
(R) Almeida, Heitor, and Thomas Philippon, 2007, The Risk-Adjusted Cost of Financial Distress, Journal of Finance 62, 2557-2586
(R) Anderson, RW, and S Sundaresan, 1996, Design and Valuation of Debt Contracts, Review of Financial Studies 9:1, 37-68
Chang, X. I. N., and Sudipto Dasgupta, 2009, Target Behavior and Financing: How Conclusive Is the Evidence?, Journal of Finance 64, 1767-1796.
Danis, András, Daniel A. Rettl, and Toni M. Whited, 2014, Refinancing, profitability, and capital structure, Journal of Financial Economics 114:3, 442-443
De Meza, David, 1986, Safety in Conformity but Profits in Deviance, The Canadian Journal of Economics 19:2, 261-269
Erel, Isil, Brandon Julio, Woojin Kim, and Michael S. Weisbach, 2012, Macroeconomic Conditions and Capital Raising, Review of Financial Studies 25:2, 341-376
Farre-Mensa, Joan, and Alexander Ljungqvist, 2013, Do Measures of Financial Constraints Measure Financial Constraints?, NBER Working Paper 19551
Frank, Murray Z., and Vidhan K. Goyal, 2015, The Profits–Leverage Puzzle Revisited, Review of Finance 19:4, 1415-1453
Giroud, Xavier, Holger M. Mueller, Alex Stomper, and Arne Westerkamp, 2012, Snow and Leverage, Review of Financial Studies 25:3, 680-710
Glover, Brent, The expected cost of default, Journal of Financial Economics (forthcoming)
(R) Graham, John R., 2000, How Big Are the Tax Benefits of Debt?, Journal of Finance 55, 1901-1941.
Graham, John R., and Mark T. Leary, 2011, A Review of Empirical Capital Structure Research and Directions for the Future, Annual Review of Financial Economics 3:1, 309-345
(P) Heider, Florian, and Alexander Ljungqvist, As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes, Journal of Financial Economics (forthcoming)
Hellwig, Martin, 1981, Bankruptcy, Limited Liability and the Modigliani-Miller Theorem, American Economic Review 71, no. 1 (March), pp. 155-170
(P) Izhakian, Yehuda, David Yermack, and Jaime F. Zender, 2016, Ambiguity and the Tradeoff Theory of Capital Structure, National Bureau of Economic Research Working Paper Series No. 22870.
(C) Jensen, Michael C., and William H. Meckling, 1976, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics 3, no. 4 (October), pp. 305-360
(C) Kraus, Alan, and Robert H. Litzenberger, 1973, A State-Preference Model of Optimal Financial Leverage, Journal of Finance 28:4, 911-922
Leary, Mark T., and Michael R. Roberts, 2009, The Pecking Order, Debt Capacity, and Information Asymmetry, Journal of Financial Economics 95, 332-355.
Leland, Hayne E., 1994, Corporate Debt Value, Bond Covenants, and Optimal Capital Structure, Journal of Finance 49:4, 1213-1252
Lin, Leming, and Mark J. Flannery, 2013, Do personal taxes affect capital structure? Evidence from the 2003 tax cut, Journal of Financial Economics 109:2, 549-565
(R) Maksimovic, Vojislav, and Josef Zechner, 1991, Debt, Agency Costs, and Industry Equilibrium, Journal of Finance 46:5, 1619-1643.
(C) Modigliani, Franco, and Merton H. Miller, 1958, The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review 48:261-297
Molina, Carlos A., 2005, Are Firms Underleveraged? An Examination of the Effect of Leverage on Default Probabilities, Journal of Finance 60, 1427-1459.
(C) Myers, Steward C., and Nicholas S. Majluf, 1984, Corporate Financing and Investment Decisions when Firms Have Information that Investors do not Have, Journal of Financial Economics 13, no. 2 (June), pp. 187-224
(R) Noe, Thomas H., 1988, Capital Structure and Signaling Game Equilibria, Review of Financial Studies 1, no. 4 , pp. 331-355
Roberts, Michael R., 2015, The role of dynamic renegotiation and asymmetric information in financial contracting, Journal of Financial Economics 116, no. 1 (April), pp. 61–81
Schaefer, Stephen M., and Ilya A. Strebulaev, 2008, Structural models of credit risk are useful: Evidence from hedge ratios on corporate bonds, Journal of Financial Economics 90:1, 1-19
Shyam-Sunder, Lakshmi, and Stewart C Myers, 1999, Testing Static Trade-Off Against Pecking Order Models of Capital Structure, Journal of Financial Economics 51:2, 219-244.
Stiglitz, Joseph E., 1969, A Re-Examination of the Modigliani-Miller Theorem, American Economic Review 59, no. 5 (December), pp. 784-793
(R) Strebulaev, Ilya A., 2007, Do Tests of Capital Structure Theory Mean What They Say?, Journal of Finance 62:4, 1747-1787
Session 2 (March 20, 2020): Initial Public Offerings
Initial public offerings are one of the most fertile areas of theoretical and empirical research in corporate finance. Three puzzles have been the subject of recurrent attention: (1) the offer price of newly issued shares is typically significantly below the price in secondary markets (underpricing); (2) IPO stocks underperform risk-adjusted benchmarks over the long term (long-term underperformance; Loughran and Ritter, 1995); (3) IPOs are strongly pro-cyclical and sometimes IPO-markets dry up completely (hot and cold markets). I will give a presentation of the Rock (1986) and the Benveniste and Spindt (1990)-explanations for underpricing. We will then look at a theory based on capacity constraints in the investment-banking industry that attempts to address all three puzzles.
Barber, B. M., and J. D. Lyon, 1997, Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics, Journal of Financial Economics 43, pp. 341-372
(R) Benveniste, Lawrence M., and Paul A. Spindt, 1989, How Investment Bankers Determine the Offer Price and Allocation of New Issues, Journal of Financial Economics 24, no. 2 (October), pp. 343-361
Benveniste, L. M., and William J. Wilhelm, 1990, A Comparative Analysis of IPO Proceeds Under Alternative Regulatory Environments, Journal of Financial Economics 28, pp. 173-207
(P) Bessembinder, Hendrik, and Feng Zhang, 2013, Firm characteristics and long-run stock returns after corporate events, Journal of Financial Economics 109:1, 83-102
Boudoukh, Jacob, Matthew Richardson, and Robert F. Whitelaw, 2008, The Myth of Long-Horizon Predictability, Review of Financial Studies 21:4, 1577-1605
Chang, Chun, Yao-Min Chiang, Yiming Qian, and Jay R. Ritter, 2016, Pre-market Trading and IPO Pricing, Review of Financial Studies (forthcoming)
Degeorge, Francois, Francois Derrien, and Kent L. Womack, 2010, Auctioned IPOs: The U.S. Evidence, Journal of Financial Economics) 98:5, 177-194
Ellul, Andrew, and Marco Pagano, 2006, IPO Underpricing and After-Market Liquidity, Review of Financial Studies 19, no. 2 , pp. 381-421
Gompers, Paul A., and Josh Lerner, 2003, The Really Long-Run Performance of Initial Public Offerings: The Pre-Nasdaq Evidence, The Journal of Finance 58, 1355-1392.
Hoechle, Daniel, Markus M. Schmid, and Heinz Zimmermann, 2012, A Generalization of the Calendar Time Portfolio Approach and the Performance of Private Investors, Working Paper, University of St. Gallen.
Jagannathan, Ravi, Andrei Jirnyi, and Ann Sherman, 2010, Why Don't Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms, National Bureau of Economic Research Working Paper Series No. 16214
(R) Khanna, Naveen; Thomas H. Noe, and Ramana Sonti, 2008, Good IPOs Draw in Bad: Inelastic Banking Capacity and Hot Markets , Review of Financial Studies 21, no. 5 , pp. 1873-1906
Kothari, SP, and Jerold Warner, 2006, Econometrics of event studies, Chapter 1 in: B. Espen Eckbo, Handbook of Empirical Corporate Finance 1:4-32
Loughran, Tim, and Bill McDonald, 2013, IPO first-day returns, offer price revisions, volatility, and form S-1 language, Journal of Financial Economics 109:2, 307-326
Loughran, Tim, and Jay R. Ritter, 1995, The New Issues Puzzle, Journal of Finance 50, no. 1 (March), pp. 23-51
Lyon, J. D.; B. M Barber, and C. Tsai, 1999, Improved Methods for Tests of Long-Run Abnormal Stock Returns, Journal of Finance 54, pp. 165-201
Mitchell, Mark L., and Erik Stafford, 2000, Managerial Decisions and Long‐Term Stock Price Performance, Journal of Business 73:3, 287-329
Ritter, Jay R., and Ivo Welch, 2002, A Review of IPO Activity, Pricing, and Allocations, The Journal of Finance 57:4, 1795-1828
Rock, Kevin, 1986, Why New Issues Are Underpriced, Journal of Financial Economics 15, pp. 187-212
Schultz, Paul, 2003, Pseudo Market Timing and the Long-Run Underperformance of IPOs, Journal of Finance 58, no. 2 (April), pp. 483-517
(R) Sherman, Ann E, and Sheridan Titman, 2002, Building the IPO order book: underpricing and participation limits with costly information, Journal of Financial Economics 65:1, 3-29
(P) Stulz, René M., 2019, Public versus Private Equity, Fisher College of Business Working Paper 2019-03-027
Tian, Xuan, and Tracy Yue Wang, 2014, Tolerance for Failure and Corporate Innovation, Review of Financial Studies 27:1, 211-255
Viswanathan, S., and Bin Wei, 2008, Endogenous Events and Long-Run Returns, Review of Financial Studies 21:2, 855-888
Session 3 (April 3, 2020): Large shareholders
One intensely debated area of corporate governance studies the role of large blockholders. One part of the literature assumes that large blockholders influence companies’ business policies to their own advantage and extract private benefits of control (e.g., Burkart, Gromb, and Panunzi 2000). Another strand of the literature argues that large blockholders have superior incentives to monitor managers and therefore offer a governance service (Shleifer and Vishny 1986; Admati, Pfleiderer and Zechner 1994). A more recent debate concerns the fact that blockholders have the option to either monitor the firm and express their concerns (“voice”) or sell their shares (“exit”). Some authors are therefore concerned that higher stock market liquidity leads to less monitoring and less effective governance (Bhide 1993), while others arrive at the opposite conclusions, based on different mechanisms (Maug 1998; Edmans 2009). These debates have also affected the perception of the governance role of hedge funds in the literature.
Admati, Anat R., Paul Pfleiderer, and Josef Zechner, 1994, Large shareholder activism, risk sharing, and financial market equilibrium, Journal of Political Economy 102:6, 1097-1130.
(R) Albuquerque, Rui, and Enrique Schroth, 2010, Quantifying private benefits of control from a structural model of block trades, Journal of Financial Economics 96:1, 33-55
Albuquerque, Rui, and Enrique Schroth, 2014, The value of control and the costs of illiquidity, Journal of Finance (forthcoming)
Bhide, Amar, 1993, The hidden costs of stock market liquidity, Journal of Financial Economics 34:1, 31-51.
Bolton, Patrick, and Ernst-Ludwig von Thadden, 1998, The ownership structure of firms: the liquidity/control trade-off, Journal of Finance 53:1.
(R) Brav, Alon, Amil Dasgupta, and Richmond D Mathews, 2014, Wolf Pack Activism, Working Paper, Duke University
Brav, Alon, Wei Jiang, and Xuan Tian, 2014, Shareholder Power and Corporate Innovation: Evidence from Hedge Fund Activism, Working Paper, Duke University
Brav, Alon, W. E. I. Jiang, Frank Partnoy, and Randall Thomas, 2008, Hedge Fund Activism, Corporate Governance, and Firm Performance, Journal of Finance 63:4, 1729-1775
Bharath, Sreedhar T., Sudarshan Jayaraman, and Venky Nagar, 2013, Exit as Governance: An Empirical Analysis, Journal of Finance 68:6, 2515-2547
Burkart, Mike, Denis Gromb, and Fausto Panunzi, 2000, Agency Conflicts in Public and Negotiated Transfers of Corporate Control, Journal of Finance 55:2, 647-677
Del Guercio, Diane, Laura Seery, and Tracie Woidtke, 2008, Do boards pay attention when institutional investor activists "just vote no"?, Journal of Financial Economics 90:1, 84-103
Edmans, Alex, 2009, Blockholders, Market Efficiency, and Managerial Myopia, Journal of Finance 64:6, 2481-2513
Edmans, Alex, Vivian W. Fang, and Emanuel Zur, 2013, The Effect of Liquidity on Governance, Review of Financial Studies 26:6, 1443-1482
Edmans, Alex, and Gustavo Manso, 2011, Governance through Trading and Intervention: A Theory of Multiple Blockholders, Review of Financial Studies 24:7, 2395-2428
Gantchev, Nickolay, Oleg Gredil, and Pab Jotikasthira, 2013, Governance under the Gun: Spillover Effects of Hedge Fund Activism, Working Paper, University of North Carolina
(P) Gilje, Erik, Todd A. Gormley, and Doron Levit, 2020, Who’s Paying Attention? Measuring Common Ownership and Its Impact on Managerial Incentives, ECGI Finance Working Paper 568/2018.
(R) Grossman, Sanford J., and Oliver D. Hart, 1980, Takeover Bids, The Free Rider Problem, and the Theory of the Corporation, Bell Journal of Economics 11, (Spring), pp. 42-64
Kahn, Charles N., and Andrew Winton, 1998, Ownership Structure, Speculation, and Shareholder Intervention, Journal of Finance 53:1, 99-129.
(P) Kempf, Elisabeth, Alberto Manconi, and Oliver Spalt, 2017, Distracted Shareholders and Corporate Actions, Review of Financial Studies 30:5, 1660–1695.
(R) Maug, Ernst, 1998, Large Shareholders as Monitors: Is there a trade-off between liquidity and control?, Journal of Finance 53:1, 65-98
Noe, Thomas H., 2002, Investor Activism and Financial Market Structure, Review of Financial Studies 15:1, 289-318
Roosenboom, Peter, Frederik P. Schlingemann, and Manuel Vasconcelos, 2013, Does Stock Liquidity Affect Incentives to Monitor? Evidence from Corporate Takeovers, Review of Financial Studies
Shleifer, Andrei, and Robert W. Vishny, 1986, Large shareholders and corporate control, Journal of Political Economy 94:3, 176-2168
Session 4 (April 24, 2020): Executive Compensation
Executive compensation is a large area of applied microeconomics, which attracts researchers from finance, accounting, and labor economics, who try to understand the many facets of the remuneration of top executives, including the sometimes astonishing magnitude of compensation (and how it is related to talent: Gabaix and Landier 2008), the structure of contracts (in particular, how pay is related to performance, e.g., Jensen and Murphy 1990; Aggarwal and Samwick, 1999). A large literature relies on a conventional principal-agent model to analyze the optimal structure and design of contracts (among many others, Hall and Murphy, 2000, 2002; Dittmann and Maug 2007). In this class we will look in particular at calibration and structural estimation as methods to investigate the structure of contracts that also try to quantify the predictions of theoretical model (Taylor 2013; Coles, Lemmon and Meschke 2012). In addition to models of bilateral contracting we will also look at market-wide general equilibrium effects (Acharya and Volpin 2010).
(R) Acharya, Viral V., and Paolo F. Volpin, 2010, Corporate Governance Externalities, Review of Finance 14:1, 1-33
Aggarwal, Rajesh K., and Andrew A. Samwick, 1999, The Other Side of the Trade-Off: The Impact of Risk on Executive Compensation, Journal of Political Economy 107, no. 1 (February), pp. 65-105
Bertrand, Marianne, and Sendhil Mullainathan, 2001, Are CEOs Rewarded for Luck? The Ones without Principals Are, Quarterly Journal of Economics 116, 901-932.
(P) Chang, Briana, and Harrison Hong, 2018, Selection versus Talent Effects on Firm Value, NBER Working Paper 24672.
(R) Coles, Jeffrey L., Michael L. Lemmon, and J. Felix Meschke, 2012, Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance, Journal of Financial Economics 103:1, 149-168
(C) Core, John E., Robert W. Holthausen, and David F. Larcker, 1999, Corporate governance, chief executive officer compensation, and firm performance, Journal of Financial Economics 51:3, 371-406
(R) Dittmann, Ingolf, and Ernst Maug, 2007, Lower Salaries and No Options? On the Optimal Structure of Executive Pay, Journal of Finance, February, 303-343
Dittmann, Ingolf, Ernst Maug, and Oliver Spalt, 2010, Sticks or Carrots? Optimal CEO Compensation when Managers are Loss Averse, Journal of Finance 65:6, 2015-2050
Dittmann, Ingolf, Ernst Maug, and Oliver G. Spalt, 2013, Indexing Executive Compensation Contracts, Review of Financial Studies 26:12, 3182-3224
Fabisik, Kornelia, Rüdiger Fahlenbrach, René M. Stulz, and Jérôme P. Taillard, 2019, Why are Firms with More Managerial Ownership Worth Less?, ECGI Finance Working Paper 587/2018
Ferri, Fabrizio, and David A. Maber, 2013, Say on Pay Votes and CEO Compensation: Evidence from the UK, Review of Finance 17:2, 527-563
Gabaix, Xavier, and Augustin Landier, 2008, Why Has CEO Pay Increased So Much?, Quarterly Journal of Economics 123, no. 1 (February), pp. 49-100
Gabaix, Xavier, Augustin Landier, and Julien Sauvagnat, 2014, CEO Pay and Firm Size: An Update After the Crisis, The Economic Journal 124:574, F40-F59
(P) Graham, John R., Si Li, and Jiaping Qiu, 2012, Managerial Attributes and Executive Compensation, Review of Financial Studies 25:1, 144-186
(C) Grossman, Sanford J., and Oliver D. Hart, 1983, An Analysis of the Principal-Agent Problem, Econometrica 51:1, 7-45
Hall, Brian J., and Kevin J. Murphy, 2000, Optimal Exercise Prices for Executive Stock Options, American Economic Review 90, (May), pp. 209-214
Hall, Brian J., and Kevin J. Murphy, 2002, Stock Options for Undiversified Executives, Journal of Accounting and Economics 33, no. 2 (April), pp. 3-42
Izhakian, Yehuda (Yud), and David Yermack, 2017, Risk, Ambiguity, and the Exercise of Employee Stock Options, Working Paper, New York University
(C) Jensen, Michael C., and Kevin J. Murphy, 1990, Performance Pay and Top-Management Incentives, Journal of Political Economy 98:2, 225-264
Lambert, Richard A.; David F. Larcker, and Robert Verrecchia, 1991, Portfolio Considerations in Valuing Executive Compensation, Journal of Accounting Research 29, no. 1 (Spring), pp. 129-149
Murphy, Kevin, Executive Compensation: Where We are, and How We Got There, in: George Constantinides, Milton Harris, and René Stulz, eds.: Handbook of the Economics of Finance (Forthcoming) (Elsevier Science North Holland, Amsterdam)
Shue, Kelly, 2013, Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers, Review of Financial Studies 26:6, 1401-1442
(R) Taylor, Lucian A., 2013, CEO wage dynamics: Estimates from a learning model, Journal of Financial Economics 108:1, 79-98
Xu, Moqi, 2013, The Costs and Benefits of Long-term CEO Contracts, Working Paper, London School of Economics
Session 5 (May 8, 2020): Mergers and Takeover Bidding
The theoretical and empirical analysis of mergers and acquisitions forms a large literature within the field of corporate finance, which covers topics such as the creation of synergies, allocation of synergies between the parties, means of payments, takeover defenses, insider trading before announcements, consequences for competition and competition policy, bidder wars, means of payments in mergers, the long-term profitability of mergers, and the corporate governance requirements for successful merger strategies. The class assumes that you are familiar with the design of short-term event studies (see the assigned chapter by Campbell/Lo/MacKinlay) that are used to analyze the synergies and the allocation of synergies between bidders and target.
Atanassov, Julian, 2013, Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting, Journal of Finance 68:3, 1097-1131
Bagnoli, Mark, and Barton L. Lipman, 1988, Successful Takeovers without Exclusion, The Review of Financial Studies 1, no. 1. (Spring), pp. 89-110
(P) Bennet, Benjamin, and Robert A. Dam, 2017, Merger Activity, Stock Prices, and Measuring Gains from M&A, Working Paper, Ohio State University
(R) Betton, Sandra, B. Espen Eckbo, R. E. X. Thompson, and Karin S. Thorburn, 2014, Merger Negotiations with Stock Market Feedback, Journal of Finance (forthcoming)
Boehmer, Ekkehart; J. Musumeci, and Annette Poulsen, 1991, Event-Study Methodology Under Conditions of Event Induced Variance, Journal of Financial Economics 30, pp. 253-272
Bond, Philip, Alex Edmans, and Itay Goldstein, 2012, The Real Effects of Financial Markets, Annual Review of Financial Economics 4:1, 339-360
Boone, Audra L., and J. Harold Mulherin, 2008, Do Auctions Induce a Winner's Curse? New Evidence from the Corporate Takeover Market, Journal of Financial Economics 89, 1-19
Bradley, Michael; Anand Desai, and E. Han Kim, 1988, Synergistic Gains From Corporate Acquisitions and Their Division Between the Stockholders of Target and Acquiring Firms, Journal of Financial Economics 21, no. 1 (May), pp. 3-40
Burkart, Mike, 1995, Initial Shareholdings and Overbidding in Takeover Contests, Journal of Finance 50, no. 5 (December), pp. 1491-1515
Burkart, Mike, Denis Gromb, and Fausto Panunzi, 1998, Why Higher Takeover Premia Protect Minority Shareholders, Journal of Political Economy 106:1, 172-204
(R) Burkart, Mike, Denis Gromb, Holger M. Mueller, and Fausto Panunzi, 2014, Legal Investor Protection and Takeovers, Journal of Finance 69:3, pp. 1129–1165.
(R) Campbell, John Y.; Andrew W. Lo, and A. Craig MacKinlay, 1997,The Econometrics of Financial Markets, Princeton, N.J. (Princeton University Press), chapter 4.
(P) Chen, Dequi, Huasheng Gao, and Yujing Ma, 2018, Human Capital Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine, Working Paper, Nanyang Technological University.
Fuller, K., Jeff Netter, and M. Stegemoller, 2002, What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions, Journal of Finance 57, 1763-1793.
(R) Harford, Jarrad, Dirk Jenter, and Kai Li, 2011, Institutional Cross-Holdings and Their Effect on Acquisition Decisions, Journal of Financial Economics 99, 27-39.
Jensen, Michael C., and Richard S. Ruback, 1983, The Market for Corporate Control: The Scientific Evidence, Journal of Financial Economics 11, no. 1-4 (April), pp. 5-50.
Karpoff, Jonathan M., and Michael D. Wittry, 2018, Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws, The Journal of Finance 73:2, pp. 657-714.
Moeller, Sara B., Frederik P. Schlingemann, and Rene M. Stulz, 2005, Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave, Journal of Finance 60, 757-782
Rhodes-Kropf, Matthew, David T. Robinson, and S. Viswanathan, 2005, Valuation Waves and Merger Activity: The Empirical Evidence, Journal of Financial Economics 77:3, 561-603
(P) Schneider, Christoph, and Oliver G. Spalt, 2019, Proxy Variables in Empirical Corporate Finance: Why Does Size Matter For Bidder Announcement Returns?, Working Paper, Tilburg University
Session 6, Part 1 (May 22, 2020): Diversification and the Conglomerate Discount
For a long time, it was an established (“stylized”) fact of the literature on diversification that diversified conglomerates are punished by capital markets by a “conglomerate discount”, whereby the conglomerate as a whole is worth less than the sum of its parts (Lang and Stulz, 1994; Berger and Ofek, 1995). More recently, Villalonga (2004) provides evidence that the conglomerate discount may not exist (she finds a conglomerate premium instead). Also, Graham, Lemmon, and Wolf (2002) argue that the conglomerate discount may result from acquirers’ selection strategy, which prefers low-valued targets. I will give an introduction into Stein’s (1997) paper to talk about the potential advantages of internal capital markets. We will then discuss the empirical issues involved in the identification and interpretation of the conglomerate discount and empirical methods to analyze internal capital markets.
(R) Almeida, Heitor, and Daniel Wolfenzon, 2005, The effect of external finance on the equilibrium allocation of capital, Journal of Financial Economics 75:1, 133-164
Bakke, Tor-Erik, and Toni M. Whited, 2012, Threshold Events and Identification: A Study of Cash Shortfalls, The Journal of Finance 67:3, 1083-1111
Berger, Philip G., and Eli Ofek, 1995, Diversification's Effect on Firm Value, Journal of Financial Economics 37, pp. 39-65.
(P) Caggese, Andrea, Vicente Cuñat, and Daniel Metzger, 2018, Firing the wrong workers: Financing constraints and labor misallocation, Journal of Financial Economics (forthcoming).
Çolak, Gönül, and Toni M. Whited, 2007, Spin-offs, Divestitures, and Conglomerate Investment, Review of Financial Studies 20:3, 557-595
Duchin, R. A. N., 2010, Cash Holdings and Corporate Diversification, Journal of Finance 65. no. 3 (June), pp. 955-992
Graham, John R.; Michael Lemmon, and Jack Wolf, 2002, Does Corporate Diversification Destroy Value?, Journal of Finance 57, pp. 695-720
Lang, Larry, and Rene Stulz, 1994, Tobin's Q, Corporate Diversification and Firm Performance, Journal of Political Economy 102, pp. 1248-1280
(P) Matvos, Gregor, and Amit Seru, 2014, Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates, Review of Financial Studies 27:4, 1143-1189
(R) Scharfstein, David S., and Jeremy C. Stein, 2000, The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment, Journal of Finance 55, no.6 (December), pp. 2537-2546
Silva, Rui, 2017, Internal Labor Markets, Wage Convergence and Investment, US Census Bureau Center for Economic Studies Paper CES-WP-13-26
(R) Stein, Jeremy C, 1997, Internal Capital Markets and the Competition for Corporate Resources, Journal of Finance 52, pp. 111-133
Villalonga, Belen, 2004, Diversification Discount or Premium? New Evidence From BITS Establishment-Level Data, Journal of Finance 59, no. 2 (April), pp. 479-506
Session 6, Part 2 (May 22, 2020): How to write a Referee Report
Berk, Jonathan, Campbell R Harvey, and David A Hirshleifer, 2016, Preparing a Referee Report: Guidelines and Perspectives, Working Paper, Stanford University
Harvey, Campbell R, 2013, Reflections on Editing the Journal of Finance, 2006-2012, Working Paper, Duke University
Hirshleifer, David, 2014, Editorial: Cosmetic Surgery in the Academic Review Process, Review of Financial Studies
Spiegel, Matthew, 2012, Reviewing less—Progressing more, Review of Financial Studies 25:5, 1331-1338
Subrahmanyam, Avanidhar, 2013, The Scholarly Review Process in Finance from an Author’s Standpoint: Some Rants and some Suggestions for Improvement, Working Paper, University of California at Los Angeles
Welch, Ivo, 2013, Referee Recommendations, Working Paper, University of California at Los Angeles
Note: The ordering of presentations in each session is normally in the order of publication, i.e., older publications come first.
Please take note of the presentation guidelines with some dos and don’ts for good presentations.