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FINM8004

Advanced Corporate Finance

Course Description This course introduces students to the academic research in corporate finance. Corporate finance theory deals with the roles of corporate in the capital market and the interactions between investors, managers, regulators and other stakeholders. The objectives of this course are to learn the theories of corporate finance, analyze the research questions, and critically evaluate the academic papers. This course focuses on selected classic and contemporary theoretical and empirical academic papers and provides students with an advanced and rigorous background in mainstream issues in modern corporate finance research. At the end of the seminar, it is expected that the students have developed an appreciation of the role of theory in corporate finance research, an in-depth knowledge of the research methods and philosophies employed in researching a wide range of corporate finance problems and issues, and an ability to critically analyze, and evaluate the literature in corporate finance.

Semester and Year Semester 2, 2015 Course URL http://programsandcourses.anu.edu.au/course/FINM8004 Mode of Delivery On campus Prerequisites FINM7007, FINM7008, FINM7041 and FINM7044 Course Convener Lili Dai Office Location: Room 4.07, CBE Building 26 C Phone: 6125 9341 Email: Lili.Dai@anu.edu.au Consultation hours: Wednesday, 10:00 – 11:00 AM

Research interests Corporate finance and financial accounting Student Administrators Patricia Penm at Room 4.51, CBE Building 26 C,

patricia.penm@anu.edu.au

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COURSE OVERVIEW

Course Learning Outcomes

Upon successful completion of the requirements for this course, students will:

1. Have developed a framework for considering other corporate finance problems and issues. 2. Have the ability to develop and test corporate finance research questions and communicate

the results. 3. Have the ability to critically analyze, and evaluate the corporate finance literature.

Research-Led Teaching

Based on selected classic and contemporary papers published in top academic journals, this course is to lead students to walk into the world of research in corporate finance, acquire the relevant knowledge from both theoretical and empirical perspectives, and develop important research capabilities with regard to communication, presentation, analysis, writing, and critical thinking.

Continuous Improvement

We use feedback from students, professional bodies and staff to make regular improvements to the course. In response to this feedback, design improvements from the previous version of the course include:

Change the word limit for course assignments.

Technology, Software, Equipment

Students are expected to have access to Microsoft Office, and a statistical package (e.g., EViews, or Stata) either through the ANU computer networks, or through a personal computer.

Requisites

To enrol in this course you must have completed FINM7007 and FINM7008 and FINM7041 and FINM7044.

Student Feedback

All CBE courses are evaluated using Student Experience of Learning and Teaching (SELT) surveys, administered by Planning and Statistical Services at the ANU. These surveys are offered online, and students will be notified via email to their ANU address when surveys are available in each course. Feedback is used for course development so please take the time to respond thoughtfully. Course feedback is anonymous and provides the Colleges, University Education Committee and Academic Board with opportunities to recognise excellent teaching and to improve courses across the university. For more information on student surveys at ANU and reports on feedback provided on ANU courses, visit:

http://unistats.anu.edu.au/surveys/selt/students/

and

http://unistats.anu.edu.au/surveys/selt/results/learning/

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COURSE SCHEDULE

Week Topic Assessment

1 Introduction, empirical method, and theory of the firm

2 Capital structure Presentation/Comments

3 Capital structure Presentation/Comments

4 Equity and debt financing Presentation/Comments/ Problem set 1 due on Friday, 14 August 2015

5 Capital investment Presentation/Comments

6 Payout policy Presentation/Comments

7 Corporate governance and monitoring Presentation/Comments Problem set 2 due on Friday, 4 September 2015

8 Corporate governance and monitoring Presentation/Comments

9 Management compensation Presentation/Comments

10 International finance Presentation/Comments

11 Information disclosure Presentation/Comments

12 Other contemporary issues Presentation/Comments/ Term paper due on Friday, 23 October 2015

13 Presentation of term paper, and course revision Term paper

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COURSE ASSESSMENT

Assessment Summary

Assessment Task 1: Course Participation (10%)

Details of task:

Students are required to attend all the lectures. Active class participation is encouraged. Students will be randomly selected to answer questions in the lectures by the lecturer. Those who appear to have failed to read the paper(s) relevant to the lecture will be noted and their marks for participation will be penalized accordingly.

Assessment Task 2: Critical Comments (15%) Details of task:

Item Assessment Task Weighting (%) Due Date

1 Course Participation 10% every week in semester

2 Critical Comments 15% every week in semester

3 Presentation 15% One/two week(s) in semester

4 Problem Set 1 10% 14 August 2015, Week 4

5 Problem Set 2 10% 4 September 2015, Week 7

6 Term paper 40% 23 October 2015, Week 12

Due Date Each week there will be a task for making comments on a paper.

Instructions 1. Critical comments are to be done by group. 2. Students will send their critical comments on the paper, which is being

presented by fellow students, to lecturer by email. 3. For the students who are presenting a paper in that week, they do not

need to send their comments to lecturer. 4. You may evaluate the paper’s weaknesses. For example, how would you

improve the paper if you were the authors in terms of motivation, contribution, research design, theory and other aspects?

5. Word limit for all the comments on each paper (not including references): 300.

Purpose To develop the ability of critical thinking.

Marking Criteria Depth and quality of comments.

Submission Details Students are to submit comments to lecturer before the second lecture of the week.

Returned assignments

Marks on comments will be informed for two times on request - in the middle and by the end of teaching period.

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Assessment Task 3: Presentation (15%) Details of task:

Assessment Task 4: Problem Sets (20% - 10% for each problem set) Details of task:

Assessment Task 5: Term Paper - Equivalent for Final Exam (40%) Details of task:

Due Date Each week there will be a student presentation in class time.

Instructions 1. Presentations are to be done by group. 2. Students are required to summarize and evaluate an academic paper

Purpose To practice presentation skills and apply knowledge learnt in class in dissecting new research.

Marking Criteria Accuracy, depth of analysis and quality of presentation.

Submission Details Students are to submit slides to lecturer after the presentation.

Returned assignments

Marks on presentations will be informed by the end of teaching period on request.

Due Date See Assessment Summary.

Instructions 1. Problem sets are to be done by group. 2. Content of problem set 1 (subject to changes): to reproduce Table 1,

Table 2, and Figure 1 in Frank, and Goyal (JFE 2003), from which the sample for analysis is ended in 1989.

3. Content of problem set 2 (subject to changes): to reproduce Table 3 in Frank, and Goyal (JFE 2003) and then extend the sample and analysis until year 2011.

4. The submission should include one mini report including necessary tables, figures, and your data analysis and a description of sample construction procedure.

5. Data will be provided in Wattle. 6. Word limit for mini report of each problem set (not including

references): 1000.

Purpose To understand and apply empirical method on data analysis.

Marking Criteria Accuracy of analysis.

Submission Details Students are to send the mini reports to the lecturer by the stated due date.

Returned assignments

Marks on presentations will be informed in about two weeks after the submissions on request.

Due Date See Assessment Summary.

Instructions 1. Term Papers are to be done INDIVIDUALLY. 2. Paper should include research question, motivation for the question,

incremental contribution that the paper will make to extant literature, research design and data requirements, and statistical techniques to be used.

3. In the last week, students will make short presentations of papers.

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Assignment Submission

Assignments are submitted using the course Wattle site. Submitted assignments must include the cover sheet provided on Wattle. Please keep a copy of the assignment for your records. The ANU is using Turnitin to enhance student citation and referencing techniques, and to assess assignment submissions as a component of the University's approach to managing Academic Integrity. For additional information regarding Turnitin please visit ANU Online. Assignments must include a cover sheet. Please keep a copy of tasks completed for your records.

Extensions and Penalties

Late submission will NOT be accepted, which will result in a score of zero for the assessment task.

Returning Assignments

Marks on assignments can be informed in two weeks after the submissions on request.

Scaling

Your final mark for the course will be based on the raw marks allocated for each assignment or examination. However, your final mark may not be the same number as produced by that formula, as marks may be scaled. Any scaling applied will preserve the rank order of raw marks (i.e. if your raw mark exceeds that of another student, then your scaled mark will exceed or equal the scaled mark of that student), and may be either up or down.

Referencing Requirements

There are no prescribed texts for this course. Instead, the course will cover a series of papers which are available on-line (see next section - Reading List).

4. Word limit for term paper (not including references): 3,500.

Purpose To come up with an original research idea, write a research proposal, and propose the data sources, and research methodology.

Marking Criteria Originality of research idea, relevance of theoretical development, and quality of research design.

Submission Details Students are to submit term papers by the stated due date.

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READING LIST

Lecture 1: Instruction, empirical method, and theory of the firm Empirical Method Petersen, Mitchell A., 2009, Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches, Review of Financial Studies 22, 435-480. Nexus of Contracts Jensen, Michael C., and William H. Meckling, 1976, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, Journal of Financial Economics 3, 305-360. Property Rights Theory Hart, Oliver, and John Moore, 1990, Property Rights and the Nature of the Firm, Journal of Political Economy 98, 1119-1158. Nature of Firm Rajan, Raghuram G., and Luigi Zingales, 1998, Power in a Theory of the Firm, Quarterly Journal of Economics 113, 387-432. Empirical Work Fee, C. Edward, Charles J. Hadlock, and Shawn Thomas, 2006, Corporate Equity Ownership and the Governance of Product Market Relationships, Journal of Finance 61, 1217-1252. Lecture 2: Capital structure Miller-Modigliani Theory Modigliani, Franco, and Merton H. Miller, 1958, The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review 48, 261-297. Capital Structure Puzzle Myers, Stewart C., 1984, The Capital Structure Puzzle, Journal of Finance 39, 575-592. Deviations from MM Theory - Effects of Taxes Miller, Merton H., 1977, Debt and Taxes, Journal of Finance 32, 261-275. * Graham, John R., 2000, How Big Are the Tax Benefits of Debt?, Journal of Finance 55, 1901-1941. Deviations from MM Theory - Effects of Managerial Agency Costs Jensen, Michael C., 1986, Agency Costs of Free Cash Flow, Corporate Finance and Takeovers, American Economic Review 76, 323-329.

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Stulz, René M., 1990, Managerial Discretion and Optimal Financing Policies, Journal of Financial Economics 26, 3-27. Lecture 3: Capital structure (continued) Deviations from MM Theory - Effects of Financial Distress Andrade, Gregor, and Steven N. Kaplan, 1998, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, Journal of Finance 53, 1443-1532. Deviations from MM Theory - Effects of Information Asymmetry Faulkender, Michael, and Mitchell A. Petersen, 2006, Does the Source of Capital Affect Capital Structure?, Review of Financial Studies 19, 45-79. Static Tradeoff Models versus Pecking Order Hypothesis Frank, Murray Z., and Vidhan K. Goyal, 2003, Testing the Pecking Order Theory of Capital Structure, Journal of Financial Economics 67, 217-248. Lemmon, Michael L., and Jaime F. Zender, 2010, Debt Capacity and Tests of Capital Structure Theories, Journal of Financial and Quantitative Analysis 45, 1161-1187. Behavioral Approaches Baker, Malcom, and Jeffrey Wurgler, 2002, Market Timing and Capital Structure, Journal of Finance 57, 1-32. * Malmendier, Ulrike, Geoffrey Tate, and Jon Yan, 2011, Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies, Journal of Finance 66, 1687-1733. Lecture 4: Equity and debt financing Initial public offering Ritter, Jay, and Ivo Welch, 2002, A Review of IPO Activity, Pricing, and Allocations, Journal of Finance 57, 1795-1828. Kathleen, Weiss Hanley and Gerard Hoberg, 2010, The Information Content of IPO Prospectuses, Review of Financial Studies 23, 2821-2864. Seasoned equity offering Thomas, Chemmanur, Shan He, and Gang Hu, 2009, The Role of Institutional Investors in Seasoned Equity Offerings, Journal of Financial Economics 94, 384-411. DeAngelo, Harry, Linda DeAngelo, and René M. Stulz, 2010, Seasoned Equity Offerings, Market Timing, and the Corporate Lifecycle, Journal of Financial Economics 95, 275-295.

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Debt financing Leary, Mark, 2009, Bank Loan Supply, Lender Choice, and Corporate Capital Structure, Journal of Finance 64, 1143-1185. * Denis, David and Stephen McKeon, 2012, Debt Financing and Financial Flexibility Evidence from Proactive Leverage Increases, Review of Financial Studies 25, 1897-1929. Lecture 5: Capital investment Corporate investment Myers, Stewart, and Nicholas Majluf, 1984, Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have, Journal of Financial Economics 13, 187-221. Bertrand, Marianne and Sendhil Mullainathan, 2003, Enjoying the Quiet Life? Corporate Governance and Managerial Preferences, Journal of Political Economy 111, 1043-1075. Malmendier, Ulrike, and Geoffrey Tate, 2005, CEO Overconfidence and Corporate Investment, Journal of Finance 60, 2661-2700. Merger and acquisition Malmendier, Ulrike, and Geoffrey Tate, 2008, Who makes acquisitions? CEO Overconfidence and the Market's Reaction, Journal of Financial Economics 89, 20-43. R&D expense and innovation Chan, Su Han, John Martin, and John Kensinger, 1990, Corporate Research and Development Expenditures and Share Value, Journal of Financial Economics 26, 255-276. * Tian, Xuan and Tracy Yue Wang, 2014, Tolerance for Failure and Corporate Innovation, Review of Financial Studies 27, 211-255. Lecture 6: Payout policy Survey evidence Brav, Alon, John Graham, Campbell Harvey, and Roni Michaely, 2005, Payout Policy in the 21st Century, Journal of Financial Economics 77, 483-527. Catering theory Baker, Malcolm, and Jeffrey Wurgler, 2004, A Catering Theory of Dividends, Journal of Finance 59, 1125-1165. Dividend taxes Chetty, Raj, and Emmanuel Saez, 2005, Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut, Quarterly Journal of Economics 120, 791-833. Share repurchase

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Grullon, Gustavo, and Roni Michaely, 2004, The Information Content of Share Repurchase Programs, Journal of Finance 59, 651-680. Dividend and repurchase Skinner, Douglas, 2008, The Evolving Relation Between Earnings, Dividends, and Stock Repurchases, Journal of Financial Economics 87, 582–609. Private firm * Michaely, Roni, and Michael Roberts, 2008, Corporate Dividend Policies: Lessons from Private Firms, Review of Financial Studies 25, 711–746. Lecture 7: Corporate governance and monitoring Board of director Rosenstein, Stuart, and Jeffrey Wyatt, 1990, Outside Directors, Board Independence, and Shareholder Wealth, Journal of Financial Economics 26, 175-191. Ferris, Stephen, Murali Jagannathan, and A. C. Pritchard, 2003, Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments, Journal of Finance 58, 1087-1112. Linck, James, Jeffry Netter, and Tina Yang, 2008, The Determinants of Board Structure, Journal of Financial Economics 87, 308-328. Large shareholder Parrino, Robert, Richard Sias, and Laura Starks, 2003, Voting with Their Feet: Institutional Ownership Changes around Forced CEO Turnover, Journal of Financial Economics 68, 3-46. Chen, Xia, Jarrad Harford, and Kai Li, 2007, Monitoring: Which Institutions Matter?, Journal of Financial Economics 86, 279-305. * Cronqvist, Henrik, and Rüdiger Fahlenbrach, 2009, Large Shareholders and Corporate Policies, Review of Financial Studies 22, 3941-3976. Lecture 8: Corporate governance and monitoring (continued) Anti takeover provision Masulis, Ronald, Cong Wang, and Fei Xie, 2007, Corporate Governance and Acquirer Returns, Journal of Finance 62, 1851-1889. Dual class Gompers, Paul, Joy Ishii, and Andrew Metrick, 2010, Extreme Governance: An Analysis of Dual-Class Firms in the United States, Review of Financial Studies 23, 1051-1088. Media coverage

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Dyck, Alexander, Natalya Volchkova, and Luigi Zingales, 2008, The Corporate Governance Role of the Media: Evidence from Russia, Journal of Finance 63, 1093-1135. Labor Faleye, Olubunmi, Vikas Mehrotra, and Randall Morck, 2006, When Labor Has a Voice in Corporate Governance, Journal of Financial and Quantitative Analysis 41, 489-510. Creditor * Nini, Greg, David Smith, and Amir Sufi, 2012, Creditor Control Rights, Corporate Governance, and Firm Value, Review of Financial Studies 25, 1713-1761. Review article Bebchuk, Lucian, and Michael Weisbach, 2010, The State of Corporate Governance Research, Review of Financial Studies 23, 939-961. Lecture 9: Management compensation Determinants Gabaix, Xavier, and Augustin Landier, 2008, Why Has CEO Pay Increased So Much?, Quarterly Journal of Economics 123, 49-100. Chhaochharia, Vidhi, and Yaniv Grinstein, 2009, CEO Compensation and Board Structure, Journal of Finance 64, 231-261. * Guthrie, Katherine, Jan Sokolowsky, Kam-Ming Wan, 2012, CEO Compensation and Board Structure Revisited, Journal of Finance 67, 1149-1168. Consequences Core, John, Robert Holthausen, and David Larcker, 1999, Corporate Governance, Chief Executive Officer Compensation, and Firm Performance, Journal of Financial Economics 51, 371-406. Cheng, Shijun, 2004, R&D Expenditures and CEO Compensation, Accounting Review 79, 305-328. Burns, Natasha, and Simi Kedia, 2006, The Impact of Performance-based Compensation on Misreporting, Journal of Financial Economics 79, 35-67. Lecture 10: International finance Institutional difference La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, 2000, Investor Protection and Corporate Governance, Journal of Financial Economics 58, 3-27. Defond, Mark, and Mingyi Hung, 2004, Investor Protection and Corporate Governance: Evidence from Worldwide CEO Turnover, Journal of Accounting Research 42, 269-312. Djankov, Simeon, Rafael La Porta , Florencio Lopez-de-Silanes , and Andrei Shleifer, 2008, The Law

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and Economics of Self-dealing, Journal of Financial Economics 88, 430-465. Cross-listing Fernandes, Nuno, and Miguel Ferreira, 2008, Does international cross-listing improve the information environment, Journal of Financial Economics 88, 216-244. Merger and acquisition Rossi, Stefano, and Paolo Volpin, 2004, Cross-country Determinants of Mergers and Acquisitions, Journal of Financial Economics 74, 277-304. Large shareholder * Ferreira, Miguel, and Pedro Matos, 2008, The Colors of Investors' Money: The Role of Institutional Investors around the World, Journal of Financial Economics 88, 499-533. Lecture 11: Information disclosure Survey evidence Graham, John, Campbell Harvey, and Shiva Rajgopal, 2005, The Economic Implications of Corporate Financial Reporting, Journal of Accounting and Economics 40, 3-73. Cost of capital Francis,Jennifer, Ryan LaFond, Per Olsson, and Katherine Schipper, 2005, The Market Pricing of Accruals Quality, Journal of Accounting and Economics 39, 295-327. * Dhaliwal, Dan, Oliver Zhen Li, Albert Tsang, and Yong George Yang, 2011, Voluntary Nonfinancial Disclosure and The Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting, Accounting Review 86, 59-100. Capital investment Biddle, Gary, and Gilles Hilary, 2006, Accounting Quality and Firm-Level Capital Investment, Accounting Review 81, 963-982. Payout policy Hribar, Paul, Nicole Thorne Jenkins, and W. Bruce Johnson, 2006, Stock Repurchases as An Earnings Management Device, Journal of Accounting Economics 2006, 3-27. Corporate governance Klein, April, 2002, Audit Committee, Board of Director Characteristics, and Earnings Management, Journal of Accounting and Economics 33, 375-400. Lecture 12: Other contemporary issues Political factor

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Goldman, Eitan, Jorg Rocholl, and Jongil So, 2009, Do Politically Connected Boards Affect Firm Value?, Review of Financial Studies 22, 2331-2360. Customer and supplier Hertzel, Michael, Zhi Li, Micah Officer, and Kimberly Rodgers, 2008, Inter-firm Linkages and The Wealth Effects of Financial Distress along The Supply Chain, Journal of Financial Economics 87, 374-387. Gender Huang, Jiekun, and Darren Kisgen, 2012, Gender and Corporate Finance: Are Male Executives Overconfident Relative to Female Executives?, Journal of Financial Economics 108, 822-839. Religion Hilary, Gilles, and Kai Wai Hui, 2009, Does religion matter in corporate decision making in America?, Journal of Financial Economics 93, 455-473. Environment Deng, Xin, and Huasheng Gao, 2013, Nonmonetary Benefits, Quality of Life, and Executive Compensation, Journal of Financial and Quantitative Analysis 48, 197-218. Appearance * Halford, Joseph Taylor, and Scott H. C. Hsu, 2013, Beauty is Wealth: CEO Appearance and Shareholder Value, Working Paper, University of Wisconsin Milwaukee.

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COMMUNICATION

Email

Lili.Dai@anu.edu.au

Announcements

Students are expected to check the Wattle site for announcements about this course, e.g. changes to timetables or notifications of cancellations. Notifications of emergency cancellations of lectures or tutorials will be posted on the door of Room 4.07, CBE Building 26 C.

Course URLs

More information about this course may be found on:

Programs and Courses (http://programsandcourses.anu.edu.au/2015/Catalogue ),

College of Business and Economics website (http://cbe.anu.edu/courses), and

Wattle (https://wattle.anu.edu.au), the University's online learning environment. Log on to Wattle using your student number and your ISIS password.

POLICIES

The University offers a number of support services for students. Information on these is available online from http://students.anu.edu.au/studentlife/

ANU has educational policies, procedures and guidelines, which are designed to ensure that staff and students are aware of the University’s academic standards, and implement them. You can find the University’s education policies and an explanatory glossary at: http://policies.anu.edu.au/

Students are expected to have read the Student Academic Integrity Policy before the commencement of their course.

Other key policies include:

Student Assessment (Coursework)

Student Surveys and Evaluations