MF895: Advanced Topics In Corporate Finance

Prof. Thomas Chemmanur
Office: Fulton 440
Phone: (617) 552 3980
Spring 2003
Wallace E. Carroll School of Management

Course Objective: The objective of this course is to introduce Ph.D students to current research issues and tools in corporate finance and financial intermediation, which will be of interest, in their dissertation research. The course will be based primarily on research papers from theoretical and empirical corporate finance, theoretical and empirical financial intermediation, and advanced game theory.  The students who can benefit the most from this course are those who plan to write their dissertations in corporate finance, financial institutions (and intermediation), and in related areas in finance and economics (e.g., industrial organization, applied game theory,  privatization).  However, students planning to write their dissertations in other areas (e.g., market microstructure, asset pricing), but who wish to obtain some exposure to current research in corporate finance, may also benefit from the course.

Pre-requisites: Students will be expected to have already taken MF891: Ph.D seminar in Corporate Finance (or have equivalent knowledge), and an introductory doctoral-level course in game theory (or have equivalent knowledge). For game theory, there have been numerous excellent and easily accessible text books written in the last four or five years. I will mention only three of these below:
1. Eric Rasmusen, Games and Information: An introduction to game theory, Basil Blackell. (A basic book)
2. Gibbons, R., Game Theory for Applied Economists, Princeton University Press, Princeton, New Jersey (intermediate level).
3. Fudenberg, D., and J. Tirole, Game Theory, M.I.T Press, Cambridge Massachusetts. (Fairly advanced)

Course materials: Most of the classes will be based on academic papers. I plan to make these available to you as we go along. Papers have been included in this seminar for several reasons. Most are recent; all are provocative; and some are substantial contributions to the literature. Many of the papers are recent job market papers, which should prove particularly instructive to students. Unfortunately, the limited time available precludes including all the interesting papers on each topic. However, the papers that are included should provide students with an entry into each research topic, which they can follow up on if they are interested in doing research in that area.

Course Requirements: Since the objective of this course is to read and understand recent work in Corporate Finance (theory and empirical) participants (both presenters and non-presenters) are expected to spend adequate time giving careful attention to the assigned readings before coming to class. Other than papers on which I choose to lecture, each paper will be presented by one participant nominated in advance for this purpose. All participants will have to take responsibility for one or two lectures each, depending on the size of the class. A  critique of the paper(s) being presented by each presenter has to be turned in by two previous selected non-presenters on the day of the paper presentation, prior to the presentation (if one student presents two papers, I require only one critique to be handed in, but covering both papers presented ). This will work out to about five or six critiques for each participant in the seminar to hand in.
Presentation Format: Each presentation must adhere strictly to the following format (1) Statement of the problem studied; (2) Brief survey of the literature; (3) Concise, intuitive, explanation of the argument producing the major results (for theory papers) or empirical methodology; (4) Summary of main  results;  (5) Critical examination of the paper;  (6) Sketch of major extensions to the paper with specific suggestions about possible solution techniques (for theory) or empirical methodology/data for these extensions (students who can effectively accomplish the last point will get extra credit).  Most important, each presentation must be both informative and entertaining.

Critique Format: Critiques must be between three to six pages in length (depending on the paper). The format of the critiques should be roughly along the following lines: (1) Statement of the problem studied; (2) Brief survey of the literature; (3) Concise, intuitive explanation of the argument producing the major results (for theory papers) or empirical methodology; (4) Summary of results; (5) Critical examination of the paper.

Course Evaluation and Grading: The course grade is determined as follows:
a. Class presentations: 40%
b. Critiques of papers: 40%
c. Class Participation: 20%

Office Hours:  For brief discussions, you can meet with me right after class (Th: 3:30 to 4:00 P.M.).  Longer office hours can be scheduled by appointment (send me e-mail if you wish to make an appointment or wish to contact me for any other reason; I prefer e-mail to phone).

Outline of Topics
The main papers that will be used in the discussion of each topic are listed below. 

Topic One: The Going Public Decision and IPOs
Chemmanur, T. and P. Fulghieri, 1999, “A Theory of the Going Public Decision,” Review of Financial Studies, 12, 249-279.
Pagano, Panetta, and Zingales, 1998, “Why do companies go public? An Empirical Analysis,” Journal of Finance 53, 27-64.
Helwage, J., and F. Packer, “The decision to go public: Evidence from corporate bond issuers,” Ohio State University working paper.

Topic Two: Investment Bank Reputation, IPOs, and Junk Bonds
Chemmanur, T., and P. Fulghieri, “Investment Bank Reputation, Information Production, and Financial Intermediation,” Journal of Finance, 1994.
Fang, L., 2002, “Investment Bank Reputation, and the Price and Quality of Underwriting Services,” working paper, the Wharton school (Job Market Paper)
Fernando, C., V. Gatchev, and P. Spindt, 2002, “ Wanna dance? How firms and underwriters choose each other,” working paper, Tulane University (Job Market Paper)

Topic Three:  Venture Capital: Theory
Chemmanur, T., and Z. Chen, 2002, “Angels, Venture Capitalists, and Entrepreneurs: A Dynamic Model of Private Equity Financing,” Boston College Working paper.
Landier, A., 2002, “Start-up Financing: Banks versus Venture Capital,” MIT working paper.
Hellman, T., 2002, “A Theory of Strategic Venture Investing,” Journal of  Financial  Economics 64, 285-314.

Topic Four:  Venture Capital Contracts, Corporate Venture Capital,  and Angel Financing: Empirical (One and a half classes)
Kaplan and Stromberg, 2001, “Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contract,” University of Chicago working paper (only this paper to be presented by a student).
Wong, A., 2001, “Angel finance: The other venture capital,” University of Chicago working paper (job market paper).
Hochberg, Y. V., 2002, “Venture Capital and Corporate Governance in the Newly Public Frim,” Stanford university working paper (job market paper). (To be presented by the same student as the previous paper).
Lindsey, L., 2002, “The Venture Capital Kieretsu Effect: An Empirical Analysis of Strategic Alliances Among Portfolio Firms,” Stanford University Working Paper (job market paper) Gompers, P., and J. Lerner, 1998, “The determinants of corporate venture capital success: organizational structure, incentives and complementarities, “ NBER working paper. (to be presented by the same student as the previous paper).

Topic Five: Corporate Spin-offs, Internal Capital Markets, and the Diversification Discount  (One and a half classes)
 Chemmanur, T. and A. Yan, 2002,  “Corporate Control Contests and the Disciplining Effects of Spin-offs:  A Theory of Performance and Value Improvements in Spin-offs,” Boston College working paper.
Hart, O., and B. Holmstrom, 2002,  “A Theory of Firm Scope,” NBER and MIT Working Paper
Rajan, R., H. Servaes, and L. Zingales, 2000, “The cost of diversity: The diversification discount and Inefficient Investment,” Journal of Finance 55, 35-80.
Stein, J. C., 1997, Internal capital markets and the competition for corporate resources, Journal of Finance 52, 111-133.
Campa and Kedia, “Explaining the Diversification Discount”, Journal of Finance 2002.
Villalonga, B., “Does Diversification Cause The "Diversification Discount"? , Working Paper

Topic Six: Corporate Takeovers and Value Creation
Fluck, Z., and A. W. Lynch, 1999, “Why do firms merge and then divest? A Theory of financial synergy, “ Journal of Business 72, 319-346.
Rhodes-Kropf, M.,  and S. Viswanathan, 2002, “Market valuation and merger waves,” Duke university working paper.
Shleifer, A., and R. Vishny, 2001, “Stock Market Driven Acquisitions,” Harvard University  working paper     (to be presented in conjunction with the previous paper).
Jovanovic, B., and  S. Braguinsky, 2002, “Bidder Discounts and Target Premia in Takeovers,” NBER Working paper.
Holmes, T. J., and J. A. Schmitz, 1995, “On the Turnover of Business Firms and Business Managers,” Journal of Political Economy, October  (to be presented in conjunction with the previous paper).

Topic Seven: Mutual Funds
Berk, J., and R. C. Green, 2002, “Mutual Fund Flows and Performance in Rational Markets,” Carnegie Mellon Working Paper.
Mamayasky and Spiegel, 2001, “A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization,” Yale School of Management Working paper.
Chevalier, J. A., and G. Ellison, 1997, “Risk Taking by Mutual Funds as a response to incentives, Journal of Political Economy, 1167-1200.
Brown, K. C., W. V. Harlow, and L. T. Starks, 1996, “Of tournaments and temptations: An analysis if Managerial Incentives in the Mutual Fund Industry,” Journal of Finance (to be presented along with the previous paper).

Topic Eight: Partnerships
Levin, J., and S. Tadelis, 2002, “A Theory of Partnerships,” Stanford University working paper.
Farrel, J., and S. Scotchmer, 1988, “Partnerships,” Quarterly Journal of Economics, 103(2), pages 279-297.
Morrison, A. D., and W. Wilhelm, 2003, “Partnership firms, Reputation, and Human Capital,” Oxford University working paper.

Topic Nine: Long-Term Operating and Stock Return Performance Following Security Issues
Loughran, T. and J. Ritter, 1997, The Operating Performance of Firms Conducting Seasoned Equity Offerings, Journal of Finance.
Barber, M., and J. D. Lyon, 1996, Detecting abnormal operating performance: The empirical power and specification of test statistics, Journal of Financial Economics 41, 359-399 (to be presented in conjunction with the previous paper).
Spiess, D. K., and J. A. Graves, 1999, The long-run performance of stock-returns following debt offerings, Journal of Financial Economics 54, 45-73.
Barber, B.,  and J. Lyon, 1997, Detecting long-run abnormal stock returns: the empirical power and specification of test statistics, Journal of Financial Economics 43, 341-372 (to be presented in conjunction with the previous paper).
Ritter, J. R., 1991, The long-run performance of Initial Public Offerings, Journal of Finance, March   (Not to presented, but useful in discussing the previous two papers).

Topic Ten: Security Design, Differential Information, and Long-term Performance
Axelson, U., 2002, “Security design with investor private information,” University of Chicago working paper.
Garmaise, M., 2001, “Rational beliefs and security design,” Review of Financial Studies, 14, 1183-1213.