Prof. Thomas Chemmanur
Office: Fulton 440
Phone: (617) 552 3980
Wallace E. Carroll School of Management
MF895: Advanced Topics in Corporate Finance
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. The “critics” of the paper should make sure that they fully understand the paper as much as the presenter: I often call upon the critics to clarify various points to the class which may not have been made clear by the presenter.
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 (Tu: 4:00 to 5:30 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 IPO Waves (Two classes)
Chemmanur, T. and A. Yan, 2003, “Product Market Advertising and IPOs: Theory and Empirical Evidence,” Boston College Working Paper
Ljungqvist, A., V. Nanda, and R. Singh, "Hot Markets, Investor Sentiment, and IPO Pricing,” NYU Working paper
Pastor and Veronesi, 2003, “IPO Waves and Stock Prices,” University of Chicago Working Paper
Pastor and Veronesi, 2003, “Stock Valuation and Learning about Profitability,” Journal of Finance 58, 1749-1789. (This paper is to be presented in conjunction with the previous one).
Jovanovic and P. L. Rousseau, 2001, “Why wait? A Century of Life Before IPO,” American Economic Review, 336-341 (Background Reading: Not to be presented)
Lowry, Michelle, and G. W. Schwert, 2002, “IPO Market Cycles: Bubbles or Sequential Learning?” Journal of Finance 57, 1171-1198.
Chada, S., 2003, “Do Insiders Knowingly Issue Overvalued Equity? Evidence from IPOs that get Delisted,” University of Alabama Working Paper (job candidate paper; to be presented in conjunction with the previous paper).
Topic Two: Optimistic Entrepreneurs, Venture Capital Fund Raising, and Exit Strategies (Two Classes)
Landier, A., and D. Thesmar, 2003, “Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence,” University of Chicago Working Paper
Lerner, J., and A. Schoar, 2002, “The Illiquidity Puzzle: Theory and Evidence from Private Equity,” NBER Working paper
Sahlman, W. A., 1990, “The Structure and Governance of Venture Capital Organizations,” Journal of Financial Economics, 27, pages 473-521 (To be briefly presented in conjunction with the previous paper).
Nahata, R., 2003, “The Determinants of Venture Capital Exits: An Empirical Analysis of Venture Backed Companies,” Vanderbilt University Working Paper (job candidate paper)
Poulsen, A., and M. Stegemoller, 2002, “Transitions: From Private to Public Ownership,” University of Georgia Working paper (To be presented in conjunction with the previous paper)
Topic Three: Financial Innovation (Two Classes)
Miller, M., 1986, “Financial Innovation: The Last Twenty Years and the Next,” Journal of Financial and Quantitative Analysis, 21, 459-471 (background reading)
Van Horne, J., 1985, “Of Financial Innovations and Excesses,” Journal of Finance (background reading)
Tufano, P., “Financial Innovation and First Mover Advantages,” Journal of Financial Economics, 1989.
Nanda, V., and Y. Yun, 1995, “Sharing the Limelight: On Why Investment Banks Co-Manage Initial Offerings of Innovative Securities with Competitors,” Working Paper, University of Michigan (to be presented in conjunction with the previous paper).
Bhattacharya and Nanda, 2000, “Client Discretion, Switching Costs, and Financial Innovation,” Review of Financial Studies.
Herrera, H., and E. Schroth, 2003, “Developer’s Expertise and the Dynamics of Financial Innovation: Theory and Evidence,” HEC Working paper.
Nanda, V., and Y. Yun, 1996, “Financial Innovation and Investor Wealth: A study of the Poison Put in Convertible Bonds,” Journal of Corporate Finance.
McConnell, J. and E. Schwartz, 1992, “The origin of LYONs: A Case Study in Financial Innovation,” Journal of Applied Corporate Finance. (to be presented briefly in conjunction with the Nanda and Yun Poison Put paper).
Finnerty, J., 1993, “An overview of Corporate Securities Innovation,” Journal of Applied Corporate Finance (to be presented briefly in conjunction with the Nanda and Yun Poison Put paper).
Topic Four: Cross Listing of Equity and Competition Among Exchanges (One class)
Chemmanur, T., and P. Fulghieri, 2002, “Choosing an Exchange to List Equity: A Theory of Cross-Listing, Listing Requirements, and Competition and Cooperation Among Exchanges.”
Doidge, C., A. Karolyi, and R. Stulz, “Why are foreign firms listed in the U.S. worth more?,” Working paper, Ohio State University.
Melvin, M., and M. Valero-Tonone, “The Effects of International Cross-Listing on Rival Firms,” Working paper, Arizona State University (to be presented in conjunction with the previous paper)
Topic Five: Trading on Long-Lived Private Information and the Role of the Specialist (Two classes)
Kyle, A., 1985, “Continuous Auctions and Insider Trading,” Econometrica.
Glosten, 1989, “Insider Trading, Liquidity, and the Role of the Monopolist Specialist,” Journal of Business 62, 211-235.
Benveniste, L., A. J. Marcus, and W. Wilhelm, 1992, “What’s Special about the Specialist?,” Journal of Financial Economics (to be presented in conjunction with the previous paper).
Strobl, G., “On the optimal allocation of new security Listings to Specialists,” Working paper, Wharton School (Job Candidate Paper)
Corwin, S. A., 2004, “Specialist Performance and New Listing Allocations on the NYSE: An Empirical Analysis,” Journal of Financial Markets
Hasbrouck, J., and G. Sofianos, 1993, “The Trades of Market Makers: An Empirical Analysis of NYSE Specialists,” Journal of Finance (to be presented in conjunction with the previous paper).
Topic Six: Heterogeneous Beliefs, Firm Valuation, and Stock Returns (Two classes)
Miller, E., 1977, “Risk, Uncertainty, and Divergence of Opinion”, Journal of Finance 32, 1151-1168. (background reading)
Harrison, J. M. and Kreps, D. M., 1978, “Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations”, Quarterly Journal of Economics 92, 323-336.
Morris, S., 1996, “Speculative Investor Behavior and Learning”, Quarterly Journal of Economics 111, 1111-1133. (to be presented in conjunction with the previous paper)
Duffie, D., Garleanu, N., and Pedersen, L. H., 2002, “Securities Lending, Shorting, and Pricing”, Journal of Financial Economics 66, 307-339.
Scherbina, A., 2001, “Stock Prices and Differences of Opinion: Empirical Evidence That Prices Reflect Optimism”, Working paper, Northwestern University.
Gopalan, M., 2004, “Short Constraints, Difference of Opinion and Stock Returns”, Working paper, Duke University. (to be presented in conjunction with the previous paper)