Corporate Finance Theory

Introduction

This course is a rigorous introduction to modern theories of corporate finance. The first half of the course establishes foundational concepts, beginning with the neoclassical and tradeoff models, and then moving to agency problems and possibly asymmetric information. The second half of the course focuses on a select group of topics, including executive compensation, corporate governance, security design, financial contracting and the theory of the firm, with a particular focus on the organizational aspects of the subjects. Empirical research in corporate finance is covered in greater depth in Empirical Corporate Finance and in DRE 7016 Topics in Corporate Finance.

Course content

PART I. Capital Structure: Debt versus Equity
1. Neoclassical Model and Tradeoff Model
2. Agency Problems & Asymmetric Information

PART II. Principal Agent theory
3. General P-A problem
4. Compensation/incentive contracts

PART III. TOPICS
5. Security design: financial contracting and optimality of debt contracts
6. Theory of the firm: incomplete contract approach
7. Allocation of authority/control
8. Stock ownership and managerial monitoring
9. Board independence