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The class blog The FinanceProfessor Blog for this class bored? Checlk out my fun links!
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Finance 401 Advanced Corporate Finance Hi! Welcome to Advanced Corporate Finance! The text book is Brealey
and Myers Principles in Corporate Finance. The newest
edition. I think it is the 7th. I apologize up front for
the price, but I can make it a bit better by telling you that we will
also be using it for 402 and I highly recommend that you keep it for
either other classes or for the real world as a reference. It is
VERY good. Here is a link to the class blog I have been told that I ask too much
of students. I do not think so, but I guess the reputation is not
totally without merit. I do ask that you keep up with the reading
and to think. I hate pure memorization and try to
challenge you to think and apply the material. Course Overview I definitely recommend that you review your 301 notes and
ideally look over your stats as well. (btw For past students who are looking for notes on my website, this class is comparable to Fin305 at Penn State and somewhat comparable to Fin365 at JMU. ) Syllabus Text If you do not have PowerPoint, you may need to download a PowerPoint viewer for the PowerPoint notes. Outline and Notes
Financial system overview Organizational Structure Corporate Finance Firm as a Nexus of Contracts Human Nature (REMM) Stakeholders and conflicts of interest Monitoring and Corporate Governance For additional POWERPOINT NOTES CLICK HERE
Convexity spreadsheet Credit risk Bond pricing Questions-Submitted Bond Pricing Spreadsheet-to be used to answer questions THANKS ADAM!!! Review of Ratios DCF vs Comparables
Accounting or Finance How to Find Cash Flow Projecting Cash flows--the spreadsheet will be modified but here it is to start
Additional Funds Needed (AFN ) This is done by assuming the ratios will remain the same. For example, teh assets to sales ratio will stay the same. Thus when we have a forecasted change in slaes we can determine what sales, liabilities, and equity will change by. AFN= Additional funds needed AFN = Required Increase in Assets Increase in assets=(Assets/Sales)*change in Sales Increase in retained earnings = (Net Margin*Sales)(1- payout ratio)
http://www.financeprofessor.com/mba610/chapt14.htm Chapter 25: the Many Kinds of Debt Chapter 24: Valuing Debt
A list of Anomalies from
Investorhome.com
Why do these anomalies
exist? If we knew they wouldn't be anomalies.
Papers on
Market Efficiency
Virtually every finance paper has some discussion of market efficiency but some of the more inportant paperws devited soley to the topic include Ray Ball's Theory of Stock Market Efficiency: accomplishments and limitations. It is published as part of Chew's The New Corporate Finance. Additionally Fama, 1991, has an excellent summary article on market efficiency. Both of these are summarized on my summaries page. Possibly less academic in nature but more convincing in reality is the fact that so few people or mutual funds either in the US, or abroad, actually beat the market on a risk adjusted basis. Some other links that should help you with market efficiency
http://www.financeprofessor.com/introcorpfinnotes/superstars.html Insider Trading A report from ABC NEWS on Insider Trading-why it won't link is beyond me http://abcnews.go.com/sections/business/DailyNews/insidertrading_020624.html How the SEC Defines Insider
Trading
MoneyCentral
has a tool that allows investors to see if insiders have been buying or
selling. and of course there is the SEC's Edgar.
To list all academic research on insier trading is beyond the scope of this class, but Bainbridge's look at Insider trading has a great Bibliography and literature review! Additionally there is insider trading and then there is insider trading. A look at Yermack's paper Efficient, not omniscient Here are some interesting links on technical analysis
Another big challenge to market efficiency (and the implied
assumption of investor rationality) is behavorial finance.
It is one of the hottest fields in finace now and there is mounting
evidence suggests that investors sometime act irrationally. This
may or may not be a problem. Remember that certain investors can
act irrationally so long as the marginal investor (the one who sets the
price) does not. However, as the evidence grows, many (including
myself) are acknowledging that behavioral finance does play a role in
how finance works. (That said, many of the behavioral finance
stories can be refuted or at least questioned.--see Fama 98?) . Behavourialfinace.net
CAPM sample problems (and answers) APT In many ways we now will make a change and head back into pure corporate finance
Without risk, With risk Various methods Risk revisted: What is correct measure? Stand-alone, project, company, or market?
Capital Structure and Security Issuance -these are from a previous version of this class. Good, but not as up to date. WACC -computation and problems If not WACC, then what? Each project should have its own discount rate. WACC is good for valuing overall firm, but that is about it. Well if the project has the same riskas the average risk of the firm, then ok but that is an exception. . Security Issuance MM and does capital structure matter? Does
the Pecking Order still hold? A mini lesson. An update:
A
series of recent papers have suggested that market timing, the pecking
order, and the tradeoff theory all work in unison. Papers
by Mayer
and Sussman, Alti,
and Flannery
and Rangan
So
maybe we wrote
off the pecking order too soon!
What else influences the type of debt a firm uses? Denis and Mihov find that the
largest determinant is the credit rating of the firm. In their
JFE article, they report that high quality firms are more likely to opt for a public issuance while medium rated firms take the bank debt route and low credit rated firms go for private debt placements. However, credit quality is by no means the only determinant. http://jfe.rochester.edu/02195.pdf For example (Barclay and Smith 1995) report that riskier firms use shorter term debt and Petersen and Rajan 1994 found that bank relationships are especially important for smaller firms. Kisgen reports that managers manage capital structure in a way to prevent downgrades and to get upgrades. For instance firms that "are near a change in credit rating" make moves to improve their rating by issuing less debt and retiring more debt. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=355680 Want still more on debt financing? Ok, but only since you are nice. ;) Baker, Greenwood, and Wurgler report in a JFE piece that firms also time debt obligations. When long-term rates are low, the firms try to capture these “low” rates, by issuing longer-term debt. Which, while not surprising, may be further evidence that market efficiency is not market perfection and that the financing waves we see may make sense (and cents) after all. http://jfe.rochester.edu/02219.pdf In a Modigliani and Miller world
when corporate taxes are introduced, the optimal debt level increases.
Desai, Foley, and Hines have a cool
paper that finds, among other things, that this positive relationship between tax rates and interest does hold. FWIW one of the “other things” that influences debt financing is the interest rate: the higher the interest rate, the less debt firms use, which fits nicely with the story above! (BTW, yes this is predominantly intended as an International Finance article, but it is cross-listed here because it is so relevant.) http://papers.ssrn.com/abstract_id=405023 Agency costs and financing (capital structure)--An alternative view to this is that managers select capital structure (and more generally all financing decisions) with their own (and not necessarily the firm's shareholders) interests at heart. The following is a list of papers that are consistent with this view of the world: One of the most frequent ways is
to focus on agency costs problems is by looking at
managerial risk aversion. (For instance: due to risk aversion managers have
incentives to use less debt than is optimal through shareholder eyes (Fama
1980)). Kayhan gives us evidence that this conflict exists. She
investigates about 1200 firms per year from 1990-2002 and finds that
“entrenched managers” have lower leverage than their industry peers (consistent
with Mehran 1992). Interestingly she finds the lower leverage is
achieved by both more equity issuances as well as lower dividend payouts.
http://www.aylakayhan.com/documents/kayhan_dec03.pdf These next two are on cash
holdings,
but I would venture that the same idea holds for financial slack. (I do
not thnk the links work--both are in the Journal of Finance--I have
also provided links to previous versions of teh paper, basic idea is
the same, but the older version is more easily available and for free
Almeida, Campello, and Weisbach
develop and test a model of cash sensitivity to cash flow. That is they
test whether
firms that are subject to financial constraints hold more cash when they have positive cash flows than do firms that apparently have lower constraints on raising new cash. The results support the theory that market frictions induce firms to hold more cash. http://www.afajof.org/Pdf/forthcoming/campello.pdf http://papers.ssrn.com/sol3/papers.cfm?abstract_id=336369 For numerous reasons managers have an incentive to hold more cash than is optimal from a shareholder perspective. These agency costs problems may be exasperated because cash can provide management with more flexibility in fighting hostile takeovers (example Harford 1999 and Pinkowitz 2002). However, as Faleye points out in an upcoming JF article, takeovers are only one means of disciplining management and proxy contests rise with cash balances. Equally important, following the proxy contest cash balances fall regardless of outcome of proxy battle. http://www.afajof.org/Pdf/forthcoming/Faleye.pdf http://papers.ssrn.com/sol3/papers.cfm?abstract_id=276480 Graham and Campbell that looks at how CFOs implement what we teach in class. Surprisingly, many of the things we spend a great deal of time on, are not used that much. For example, “maintaining financial flexibility” is seen as the most important determinant in setting a firm’s capital structure. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=395221 October 22, 2004--While in NYC the SBU Finance Club met with Chris Kinslow and went over a Bankrupcty case. Here are some of teh notes from theto finance club Jay Ritter is simply put "the
man" when it comes to
IPOs. Not only do he and Ivo Welch have a classic
review article on IPOs, he also has most of the very influential
IPO papers as well. Moreover, his website is a wealth of
IPO data
and papers. For example he provides evidence
of underpricing on a year by year basis as well as waves, and
international
IPO underpricing. He also has a very cool table
on the amount of money left on the table by various firms and a
list of firms that went up by at least 100% on the
first day of trading. He is also the person most responsible for
the long run
underperformance literature.
Why do companies go public? By Pagano, Panetta, and Zingales Why underpricing? Maybe threat of lawsuits (Lowry and Shu 2002) A summary of Brav and Gompers on the long run underperformance of IPOs. Are waves irrational? Maybe not. Maybe changes in real options. Very good article by Pastor and Veronesi. Advertising and IPOs? They seem to be connected. As does underpricing and analyst coverage. SuperBowl and IPOs? Yep there is a connection! End of Lock-up periods Make some noise!. The quiet period is over! TIme for analyst coverage to begin. Ritter and Loughren on how IPOS have changed 9. Quick discussion of financial engineering and why we have so many types of securities
Types Horizontal merger_acquiring competitor Fan and Goyal find that there are
postivie abnormal returns from vertical acqustions. Definitions Merger: absorbtion of firm A by firm B...in end all are mergers Acqusition of stock: Purchase--done either in open market or through tender offer Acquistion of Assets Proxy contest also steeped up depreciation Tax implications: if deal is seen as a table event: trigger capital gain, if not then no taxes now. Takeover waves (and types) History lesson
These in part of can be
explained by the Agency Costs and by stock price overvaluation. These latter hypotheses won support
from Gugler,
Mueller, and Yurtoglu (2003) Hostile or Friendly? LBO--Opler finds improved
performance following deal. Why? Best guess is better
incentives Laws
Regulation comes in several formats. First attempt to protect
shareholders (ex. Williams Act) How a merger can
create value
Generally overall value is created.
Most of this goes to shareholders of target. From Jensen and Ruback (1983)
Target %
Bidder % Unsuccesful bids may have value if
they improve management or if they put firm in play. Bradley,
Desai, and Kim (1983) fidn that those firms who do not receive another
bid give up their abnormal returns in 2 years. How a merger can destroy value Dissynergy--Comment
and Jarrell---can you say deworsifcation Maybe they destroy value
by signalling overvaluation? That is one interpretation of Loughran
and Vijh (1997) Corporate culture Hostile vs friendly Hostile deals get the publicty Most deals are
friendly how to fight acquistions
shark repellants
Super majority
Fair Price Amendments Staggered Boards Posion Pills
Asset restructuring
--selling crown's jewels,
one time dividend Buyback--possibly greenmail Litigation-sue everyone Make it political Pac men and White Knights Other forms of restructring: Key
questions
Discussion of Junk Bonds and Milken
Muslu
, Xie,
and Neilsen
in separate articles find that the level (lower), form of pay (more or
less incentive based), and transparency is affected by the board
makeup. The NY Times reports much the same in "Pay
often set by non-independent compensation committees."
Discussion from Christian Brothers (CBIS) on Proxy voting, Proxyinformation.com, and maybe the easiest to follow from Pax funds.
Where
does auditing fit into this? Can't improve things unless we know
what is going on. Chaney
and Phillpich (JAR 2002) find that stock prices dropped as
Andersen's reputation worsened. Also Callen
and Morel as well who find that with a similar
results with a slightly different sampe. What is Wrong with Corporate
Governance?
Lack
of transparency is likely the most severe problem. What is Right with Corporate
Governance? Overall
US system seems to be best there is. Sure there are problems, but
better than alternatives. The problems A few sites that you may find
useful: theory on pay
International differences
Test 2 from Fall 1999 |
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