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Regular version of the site
Master 2019/2020

Corporate Finance-2

Type: Compulsory course (Strategic Corporate Finance)
Area of studies: Finance and Credit
Delivered by: School of Finance
When: 1 year, 1, 2 module
Mode of studies: offline
Instructors: Irina Ivashkovskaya, Nikita Pirogov, Aziza Erkinovna Ulugova, Veronika Vinogradova
Master’s programme: Strategic Corporate Finance
Language: English
ECTS credits: 5
Contact hours: 64

Course Syllabus

Abstract

The course is absolutely necessary for developing the analytical skills in the area of corporate financial decisions and understanding their relevance to the empirical evidence in developed and emerging markets. It covers the extensions for the key concepts in corporate finance explaining hurdle rates and cost of equity analysis in the integrated and segmented capital markets, the financing and payout decisions and the empirical research in the field of developed and emerging markets data, and the corporate control and governance issues with the emphasis on financial architecture of the modern firm. The course is thought to become a core theoretical background to the related financial courses for advanced studies.
Learning Objectives

Learning Objectives

  • The course is focused on methodology of analysis of different corporate financial decisions, their empirical testing, empirical evidence and new developments. Corporate finance advanced provides an important input to the development of research skills in finance.
  • Understand how the key concepts for corporate financial decisions have been further developed
  • Learn the remaining puzzles in corporate finance empirical evidence in the key concepts
  • Learn how the empirical studies are built upon the theoretical arguments in the field
  • Apply theoretical conceptions to the corporate sector in Russia, other emerging markets and European countries given the actual data on predetermined firms
Expected Learning Outcomes

Expected Learning Outcomes

  • Be able to analyze the performance of a firm applying economic profit criteria
  • Be able to apply different methods to determine the life cycle of the firm
  • Be able to apply different methods for cost of debt and cost of equity estimation in developed and emerging capital markets
  • Be able to apply different methods to estimate the cost of debt
  • Understand the limitation of asset pricing models
  • Understand the specifics of the cost of capital estimation on emerging markets
  • Understand major empirical methods to analyze corporate financing policy, payout policy
  • Understand the key concepts of capital structure
  • Be able to choose and apply methods of determining the optimal leverage for non-financial firms
  • Understand how to test empirically different capital structure theaories
  • Be familiar with major empirical studied on corporate financing policy
  • Understand the concept of real option with respect to capital budgeting
  • Be able to apply decision tree approach to capital budgeting problems
  • Understand the key theories and concepts with respect to payout policy
  • Be familiar with major empirical studies on the payout policy
  • Be able to analyze the payout policy of the firms on developed and emerging markets
  • Be familiar with the concept of the corporate financial architecture
  • Understand possible impact of the corporate governance mechanism over performance
  • Be able to analyze the financial architecture of the firms on developed and emerging markets
  • Be able to estimate internal capital market efficiency
Course Contents

Course Contents

  • Corporate finance framework for company analysis
    Advantages of corporate organizational forms for studying different financial decisions of a firm. The limitations of accounting-profit based analysis of a firm. Why do we need to understand economic profit and opportunity costs applications to the analysis of a firm? Going beyond accounting profit-based analysis. The life cycle of a firm: the dilemmas at each LCO stage. The financial measurers of a firm over the LCO. The financial metrics for the short -term horizon. The cash flows of the firm at different LCO stages. Why do we need free cash flows instead of accounting -based types of cash flows? The methods to identify the stage of LCO by financial data. Why do analysist need non-financial data? Non-financial data for financial analysis of a firm. The living (knowledge) firm and intellectual capital. Is the behavior of management and members of the board always rational? Why do we need to study anomalies in behavior within top management teams? Value creation approach to corporate policies.
  • Designing capital structure decisions. The trade-off framework
    What is capital structure and how it differs from financing mix. Financial leverage and the benefits of debt. The determinants of financial leverage. How to measure benefits of debt? The case of corporate tax rates. How to measure the benefits of debt with personal taxes . The marginal tax benefits function and modeling corporate capital structure choices with corporate and personal tax rates. Dynamic trade-off theory of capital structure. How to measure cost of financial distress? The mean reversion of financial leverage, the target debt ratio and the predictions about its dynamics. The methods for empirical tests of trade-off theories. Target capital structure models for empirical tests: the fitted values. The determinants of adjustments costs. Summarizing trade-off concept: the role for equity holders and for the management decisions
  • Corporate cost of capital
    The globalization of capital markets and its implications to asset pricing. The assumption of internationally integrated capital market and the types of global asset pricing models: World (Global) CAPM, The determinants of equity market premium at the internationally integrated capital market: identical consumption-opportunity sets across countries and world beta (Fama,1976). The Global (World) capital asset pricing model (GCAPM): its assumptions, features and variables. The comparison of Global (World) capital asset pricing model to Domestic (Local) capital asset pricing model (Stulz, 1995). Multi-beta Global capital asset pricing model and cross- section of global stock returns: the World two-factor asset pricing model (Fama/French,1998); multi-beta asset pricing model for emerging markets (Harvey, 1995).The limitations of world asset pricing models. The underweighting of foreign stocks in portfolio and the home bias. The explanations for the home bias: the barriers to international investing, the ownership restrictions, the consumption patterns, the human capital. The assumption of internationally segmented capital markets and segmentation. The explicit constraints and barriers to globally diversify the portfolio. The degree of integration of an emerging market into the global capital market and the barriers for diversification in emerging markets. The systematic and unsystematic risks in emerging markets. The methods for empirical testing of segmentation hypothesis versus integration hypothesis: Bekaert/Harvey, 1995; Bekaert/Harvey, 2000; Henry,2000; Chari/Henry,2001. Sovereign risk and the reasons and methods of adjustments to the asset pricing models. The sovereign risk measurers. The systematic risks in emerging markets and the cost of equity analysis for an emerging market. The Adjusted asset pricing models for emerging markets: the risk free asset, the sovereign spread. the Hybrid capital asset pricing models (HCAPM). The methods of pricing the risk premiums for emerging markets: spread, relative volatility, Alternative measurers for systematic risks in emerging markets: the downsize risk and the DCAPM by Estrada. Cost of debt in case of company’s credit rating absence in emerging markets. How to apply the synthetic approach to identify the current cost of debt
  • Returning Cash to Shareholders. Disappearing dividends
    Signaling and adverse selection models of corporate payout policies. The model with dividends and share repurchase perfect substitution for one another. The model with dividends and share repurchase imperfect substitution for one another (John/Williams,1985). The new stage in signaling explanations of payout policies: the better informed clientele (Alen/Bernardo/Welch, 2000), the change in risk signaling effects and ―maturity hypothesis‖ (Grullon/Michaely/Swamianathan, 2002). The methods for testing signaling models of corporate payout policies: event studies, time series (Fama/French, 2003), partial adjustment model to control for the predictable component of future earnings(Grullon/Benartzi/Michaely/Thaler,2003). Empirical evidence on signaling models for payout policies. The measurers for share repurchases (Stephens/Weisbach ,1998). The stylized facts on share repurchases. The adverse selection costs of share repurchases (Brennan/Thakor, 1990). The empirical evidence on share repurchases. The adjustments to the Lintner stylized facts model by dividend- forecast error (Grullon/Michaely, 2002). The share repurchases decisions and stock option plans (Weisbenner, 2000). The determinants of corporate payout policies studies in a new economy (Graham/Harvey, 2003). The dividend premium in new issues (Baker/Wurgler, 2000). The corporate payout policies in emerging markets. The determinants of payout policies in emerging markets. Comparative studies in dividend policies in developed and emerging markets.
  • Investing decisions under uncertainty
    Standard set of questions we usually ask about our investment alternatives. Nonconflicting set of investment criteria. What do we usually think about “E(NPV)>0 recommendation” Why practitioners require additional info to plan corporate investments. How do we compare risk vs uncertainty. What-if analysis to prepare additional analytics. Decision-trees as instrument to visualize optimal decision as uncertainty resolves. Monte-Carlo simulations to build NPV distribution. Discussion of additional analyticsWhat are value propositions in modernization? Dealing with uncertainty: putting drivers into a model for analysis, scenarios and sensitivities. Applying investment criteria to choose optimal bidding strategy and optimize investment program
  • Corporate Financial Architecture
    The components of financial architecture of the firm. Ownership structure and corporate performance. The empirical research on the role of ownership structure: the research models, the methods of testing and the evidence. The performance of owner-controlled firms and manager-controlled firms. The empirical studies on ownership dispersion and corporate value as a measurer for performance (Gugler,2004).The dispersed shareholder‘s ownership and corporate performance: the hump-shaped relation between concentration of ownership and market capitalization: McConnell/Servaes,1999. Managerial ownership and its influence over the performance. The problem of endogeneity of ownership concentration in empirical research on ownership and performance: Demstez/Lehn,1985; Kole,1995; Cho,1998; Demsetz/Villalonga,2001; Claessens et all.,2000. The institutional ownership and its influence over the performance. The blockholder models and the benefits and costs of large shareholder monitoring. The monitoring incentives of blockholders and motivation to hold larger blocks (Huddart,1993). The monitoring incentives of firms with liquid secondary market: the models and empirical research (Kahn/Winton,1998; Maug,1998). Corporate Governance within financial architecture of the firm and the role of Boards. The corporate governance ratings and the methods for the quality of governance study. Corporate governance and corporate performance. The types of research models and results. Internal capital markets, the methods for intra-firm bargaining and internal allocation of financial capital. The benefits and disadvantages of internal allocations of financial capital. The nature of conglomerate discounts and premiums. The efficient internal capital market and creation of corporate value: the model of conglomerate by Stein (1997). The investment decisions of conglomerate firms. The relation between the internal capital market efficiency and the amount of external capital raised. The measurers for internal capital market efficiency: the excess net external capital. Internal market size measures by Peyer (2001), the index of diversified firm‘s internal market by Billet/Mayuer (2003).The cross-subsidization and the nature of diversification discounts. The methods of empirical testing of efficiency of investment decisions: segment Tobin‘s q, (Whited, 2001;Shin/Stulz,1998; Scharfstein, 1998); the industry adjusted investment by Rajan/Servaes/Zingales (2000).
Assessment Elements

Assessment Elements

  • non-blocking Team project: stage 1 LCO
  • non-blocking Team project: stage 2. WACC
  • non-blocking Team project: stage 3 - capital structure
  • non-blocking Case studies on capital structure
  • non-blocking Case studies on investing decisions under uncertainty
  • non-blocking Case studies on real options
  • non-blocking Team project: stage 4 - financial architecture
  • non-blocking Final exam
  • non-blocking Case studies in payout policy
Interim Assessment

Interim Assessment

  • Interim assessment (2 module)
    0.08 * Case studies in payout policy + 0.08 * Case studies on capital structure + 0.07 * Case studies on investing decisions under uncertainty + 0.07 * Case studies on real options + 0.4 * Final exam + 0.07 * Team project: stage 1 LCO + 0.07 * Team project: stage 2. WACC + 0.08 * Team project: stage 3 - capital structure + 0.08 * Team project: stage 4 - financial architecture
Bibliography

Bibliography

Recommended Core Bibliography

  • Arnold, G. (2010). Financial Times Handbook of Corporate Finance : A Business Companion to Financial Markets, Decisions and Techniques (Vol. 2nd ed). New York, NY: Financial Times/ Prentice Hall. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1417523
  • Asquith, P., & Weiss, L. A. (2016). Lessons in Corporate Finance : A Case Studies Approach to Financial Tools, Financial Policies, and Valuation. Hoboken, New Jersey: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1202839
  • Baker, H. K., Veit, E. T., & Singleton, J. C. (2010). Survey Research in Corporate Finance : Bridging the Gap Between Theory and Practice. New York: Oxford University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=349677
  • Berk, J. B., & DeMarzo, P. M. (2014). Corporate Finance: The Core, Global Edition (Vol. Third edition). Boston: Pearson. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1417990
  • Corporate Finance: Theory and Practice / Pierre Vernimmen, Pascal Quiry, Maurizio Dal-locchio, Yann Le Fur, Antonio Salvi. – 5th ed. – Chichester: John Wiley & Sons Ltd, 2018. – 1010 p.
  • Financial markets and corporate strategy, Hillier, D., 2012

Recommended Additional Bibliography

  • Atanasov, V., & Black, B. (2016). Shock-Based Causal Inference in Corporate Finance and Accounting Research. Critical Finance Review, (2), 207. https://doi.org/10.1561/104.00000036
  • Corelli, A. Analytical Corporate Finance / Angelo Corelli. – 2nd ed. – Cham, Switzerland: Springer Nature Switzerland AG, 2018. – (Springer Texts in Business and Economics). - Текст: электронный // DB Springer Books [сайт]. - URL: https://link.springer.com/book/10.1007/978-3-319-95762-3