Postgraduate course 2020/2021

Modern research in corporate finance

Type: Elective course

Area of studies: Economics

Delivered by: School of Finance

When: 2 year, 1 semester

Mode of studies: offline

Instructors: Alexandre Abramov, Elena Fedorova

Language: English

ECTS credits: 4

Contact hours: 44

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

• 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

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

Course Contents

• Corporate cost of capital. Corporate hurdle rates analysis: the case of emerging markets
  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
• Designing capital structure decisions. Empirical results, new trends and policy implications
  Why do we need dynamic trade-off theory of corporate structure? The quantitative assessment of the costs of financial distress: the methods and the results. The nature and the structure of the costs of financial distress: fixed costs and variable costs (Haugen/Senbet, 1978; Leary/Roberts, 2004).The research models for quantitative assessments of direct costs of financial distress by Antrade/Kaplan (1998), Weiss (1990), Maksimovich/Phillipps (1998), Gilson(1997), Almeida/Philippon (2006), Philisophov/ Philisophov (2002,2005). The marginal tax benefits function and modeling corporate capital structure choices with corporate and personal tax rates (Graham, 2003). The quantitative assessments of tax benefits streams. The mean reversion of financial leverage, the target debt ratio and the predictions about its dynamics. The models with rebalancing and recapitalization: upper and lower limit policy of the firm (Fischer,et all,1989). Target adjustment behavior of the corporations. The determinants of adjustments costs. The models with exogenous investment policies (Strebulaev,2004). The retained earnings factor, the interaction of investment and financing decisions, the endogenous financing policies in dynamic trade-off modeling: Titman/Tsyplakov, 2004; Hennessy/ Whited, 2004. The methods for empirical testing of trade-off theories: cross section regressions, target adjustments techniques. The evidence for capital structure and the major results of empirical studies in trade – off theories for developed economies: Rajan/Zingales (1995); Gul (1999); Hovakim/ Opler/, Titman (2001). The dynamic theories of capital structure and optimal debt ratio modelling. The distress tax model of target debt ratio (Titman/Opler,1994). Target capital structure models for empirical tests: the fitted values. The research on determinants of capital structure and the regression model for capital structure planning. The determinants of the speed of adjustment. Pecking order of financing models based on adverse selection. The adverse selection model with current shareholders participation in new equity issues: the pecking order of equity flotation method (Eckbo / Norli, 2004).The adverse selection with asymmetric information about risk (Halos/Heider, 2004). The agency costs and their role in financing hierarchy. The agency costs of equity financing by Myers (2003). The joint hypothesis (Shulz, 1990; Harris- Raviv, 1990). The window of opportunity theory% the impact over development of the pecking order approach to the capital structure choice (Backer,Wurgler, 2002). The methods for empirical testing of pecking order of financing choices: event studies (Shyam-Sander, 1991), times series ( Frank/Goyal ,2003; Fama/ French,2002). The stakeholder's theory of the firm and its application to the capital structure choices: the model by Titman-Grinblatt. The costs imposed on stakeholders and their influence over the capital structure choices. The intellectual capital and the capital structure choices. How intellectual capital may be considered in financing choices: Zingales. The financial approach to capital structure planning as compared to the traditional accounting data-based EBIT-EPS analysis. The adjusted present value (APV) model, the operating income model of planning for optimal debt ratio, the credit rating model, the weighted average cost of capital model. Planning for optimal capital structure in the firms with growth opportunities (Lang, Stultz, Ofek,1996).
• Investing decisions under uncertainty. Real options: managerial flexibility and corporate decisions
  Managerial flexibility of firm‘s financial and investment decisions. Definition of real option. Types of simple real options: option to defer, option to expand, option to contract, option to abandon. Description of real option parameters compared to financial option parameters. Decision tree analysis. Valuation of risky assets discounted at risk adjusted rate. Method of certainly equivalent cash flows. Real option valuation in discrete time. Replicating portfolio and risk-neutral probabilities in discrete time. Quantifying uncertainty, several approaches: discounted cash flows (DCF), decision tree analysis (DTA) and real option valuation (ROV).Portfolio of real options. Compounded real options. Moving form discrete time to continuous time. Option pricing in continuous time, Black, Scholes, Merton equation. Assumptions and restrictions of Black, Scholes, Merton model. Application of Monte-Carlo method to real option valuation. Option to switch. Advantages and restrictions of real option methodology. Industries where real options are most applied. Real options in oil and mining industrial sectors. Valuation of oil and gas licenses.
• Returning Cash to Shareholders. Payout Policies Puzzles and Empirical Research
  Signaling and adverse selection models of corporate payout policies. The strengths and weaknesses of payout signaling literature based on early models (Bhattacharya, 1979). 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.
• Corporate Financial Architecture: the Patterns and Policies within LCO
  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. The model for research by Corporate finance center (CFC) of HSE. 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

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

Interim Assessment

• Interim assessment (1 semester)
  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

Recommended Core Bibliography

• Alberto Moel, & Peter Tufano. (1998). Bidding for the Antamina Mine: Valuation and Incentives in a Real Options Context. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.C59C9DE

Recommended Additional Bibliography

• Childs, P. D., Ott, S. H., & Triantis, A. J. (1998). Capital Budgeting for Interrelated Projects: A Real Options Approach. Journal of Financial and Quantitative Analysis, (03), 305. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.a.cup.jfinqa.v33y1998i03p305.334.00
• Friedl, G., Copeland, T., & Antikarov, V. (2018). Real Options. A Practitioner´s Guide, Book Review. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.5BD264EB
• Herath, H. S. B., & Park, C. S. (1999). Economic Analysis of R&D Projects: An Options Approach. Engineering Economist, 44(1), 1. https://doi.org/10.1080/00137919908967506
• Trigeorgis, L. (1996). Real Options : Managerial Flexibility and Strategy in Resource Allocation. Cambridge, Mass: MIT Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=11389