John Molson School of Business
Department of Finance
Financial Theory and Corporate Policy Decisions
Doctoral Seminar ADMI 840X
Fall Semester 2007
Professor: Harjeet S. Bhabra 848-2424 x 2909 GM 300-73 email@example.com
The primary aim of the course is to provide an integrated presentation of recent advances in corporate
finance. Both theoretical and empirical developments will be emphasized. Much of the theory that has
been developed in the corporate finance literature in the last few decades has been based on the
regulatory and institutional framework prevailing in the North American financial markets. In recent
years, however, these theories have been put to rigorous empirical tests in international markets also.
This course, therefore, will also provide an international perspective on corporate financial decision
making by looking at some recent research with international data. As noted earlier, this course intends
to provide a forum for the discussion of theoretical and empirical research published and in progress.
Given the breadth of topics in the broad area of corporate finance and the explosion of research, it is
impossible to do full justice to each topic in the limited time that we have available. The coverage is
organized around four fundamental themes in finance; namely, the neoclassical paradigm of a firm’s
decisions and its breakdown, information asymmetry and signaling, moral hazard and agency and
corporate control. Within this broad framework, we will discuss theoretical and empirical issues relating
to corporate financing decisions, capital acquisition process, corporate governance and compensation
design, and mergers and acquisitions. Issues of risk management and corporate hedging will be taken up
depending on the availability of time.
The course will be taught through a combination of lectures and presentations. Students will be required
to present published papers in the class on a regular basis. The objective is to provide a framework for
interactive discussion of the topic in hand.
The Code of Conduct (Academic) at Concordia University states that the “integrity of University
academic life and of the degrees, diplomas and certificates the University confers is dependent upon
the honesty and soundness of the instructor-student learning relationship and, in particular, that of
the evaluation process. As such, all students are expected to be honest in all of their academic
endeavours and relationships with the University.” [Graduate Calendar, Code of Conduct (Academic).]
All students enrolled at Concordia are expected to familiarize themselves with the contents of this Code.
You are strongly encouraged to visit the following web address:
http://johnmolson.Concordia.ca/ugrad/codeofconduct.pdf, which provides useful information about
proper academic conduct.
There is no prescribed textbook since the course is based entirely on articles. However, the following
books are recommended to supplement the material covered in class and can be borrowed from me:
Copeland, Thomas E., J. Fred Weston and Kuldeep Shastri, Financial Theory and Corporate Policy, 3rd
Smith, Clifford (editor), Modern Theory of Corporate Finance 2nd edition.
Weston, J. Fred, et al, Takeovers, Restructuring, and Corporate Governance, various editions,
Each student will present 4 articles (or 5 depending on the class size) in the class from the prescribed
readings list. Select your article from the non-starred references, 2 articles must be selected from the
materials in the first 6 lectures and 2 articles are to be selected from lectures 7 to 12. Each student will
present a two-page summary of the article presented to every member of the class. You are required to
read the articles prior to their presentation in the class to facilitate a more effective discussion. Class
participation is an integral part of the evaluation process. There will be a two-part take-home midterm
designed to evaluate students’ comprehension of theory, its implications and its relationship with the
relevant literature. Finally, every student is required to produce a research paper at the end of the
semester. The research paper should demonstrate the student’s comprehension of the theoretical
underpinning of the problems being investigated and the ability to synthesize the relevant literature. The
research paper should be between 20-25 pages (typed and doubled spaced). Students will present their
research papers during the last class and the final version is due approximately two weeks later – the
exact date will be determined in class.
Typically, the research paper must clearly state:
(i) Research objectives/motivations/scopes
(ii) Relevant literature review
(iii) Hypotheses or research questions
(iv) Sample and data sources
(v) Model specification and/or test methods
(vi) Limitations of the proposed research
(vii) Future research avenues
The research paper will be graded based on difficulty of topic, profoundness of analysis, writing, and
seriousness of investigative efforts.
Paper presentations 20%
4 or 5 presentations
Class participation 10%
Event study 15%
Paper Review 15%
Research paper 40%
AER: American Economic Review
BJE: Bell Journal of Economics
JF: Journal of Finance
JFE: Journal of Financial Economics
JFQA: Journal of Financial and Quantitative Analysis
JFR: Journal of Financial Research
JB: Journal of Business
JACF: Journal of Applied Corporate Finance
RFS: Review of Financial Studies
JPM: Journal of Portfolio Management
FM: Financial Management
JLE: Journal of Law and Economics
Lecture #1, Sep 6: Event study analysis
Barber, Brad M. and John D. Lyon, “Detecting long-run abnormal stock returns: The empirical power
and specification of test statistics”, JFE 43 (1997)
Boehmer, Eddehart, Jim Musumeci and Annette B. Poulsen, “Event-study methodology under
conditions of event-induced variance”, JFE 30 (1991)
Brown, Stephen J. and Jerold B. Warner. "Measuring Security Price Information," JFE, 1980, v8(3),
Brown, Stephen J. and Jerold B. Warner. "Using Daily Stock Returns: The Case Of Event Studies," JFE,
1985, v14(1), 3- 31.
Chopra, Navin, Josef Lakonsishok, and Jay R. Ritter, “Measuring abnormal performance: do stocks
overreact?”, JFE 31 (1992).
Fama, Eugene, “Market efficiency, long-term returns, and behavioral finance”, JFE 49 (1998).
Karafiath, Imre, “On the efficiency of least squares regression with security abnormal returns as the
dependent variable”, JFQA 1994.
Kothari, S. P. and Jerold B. Warner, “Measuring long-horizon security price performance”, JFE 43
** Kothari, S. P. and Jerold B. Warner, “Econometrics of event studies”, Working Paper, Tuck School
of Business at Dartmouth.
Lyon, John D., Brad M. Barber and Chih-Ling Tsai, “Improved methods for tests of long-run abnormal
stock returns”, JF, 1999.
** MacKinlay, A. Craig, “Event studies in economics and finance”, Journal of Economic Literature,
Mitchell, Mark L., and Erik Stafford, “Managerial Decisions and Long-Term Performance”, JB 73 2000.
Palepu, Krishna G., “Predicting takeover targets: a methodological and empirical analysis”, Journal of
Accounting and Economics 1986.
Strong, Norman, “Modeling abnormal returns: a review article”, Journal of Business Finance &
Accounting 19 (1992).
Thompson, Rex, “Conditioning the return-generating process on firm-specific events: a discussion of
event study methods”, JFQA 20 (1985).
Lecture #2 and 3, Sept 13 and Sep 20: Corporate financial policy – theory and
Berger, P.H., E. Ofek and D.L. Yermack, 1997, Managerial entrenchment and capital structure
decisions, JF 52(4), 1411-1438.
** Bhabra, H.S., T. Liu and D. Tirtiroglu, 2006, Capital Structure Choice in a Nascent Market: Evidence
from Listed Firms in China, FM, forthcoming.
** Booth, L., V. Aivazian, A. Demirguc-Kunt and V. Maksimovic, 2001, Capital Structures in
Developing Countries, JF 56(1), 87-130.
DeAngelo, H. and R. Masulis, 1980, Optimal capital structure under corporate and personal income
taxation, JFE 8, 3-29.
** Demirguc-Kunt, A. and V. Maksimovic, 1999, Institutions, financial markets, and firm debt maturity,
JFE 54(3), 295-336.
Galai, D. and R. W. Masulis, 1976, The option pricing model and the risk factor of stock, JFE Jan/Mar,
Garvey, G.T. and G. Hanka, 1999, Capital structure and corporate control: The effects of anti-takeover
statutes on firm leverage, JF 54(2) 519-546.
Leland, H. and D. Pyle, 1977, Information asymmetry, financial structure and financial intermediation,
JF (May), 371-388.
Masulis, R., The effects of capital structure change on security prices: A study of exchange offers, JFE
** Miller, M.H., 1977, Debt and taxes, JF 32, 261-276.
** Modigliani, F. and M.H. Miller, 1958, The cost of capital, corporation finance and the theory of
investments, AER 47, 261-297.
** Modigliani, F. and M.H. Miller, 1963, Corporate income taxes and the cost of capital: A correction,
AER 53, 433-443.
** Myers, S.C., 1977, The determinants of corporate borrowing, JFE 5, 147-175.
** Rajan, R.G. and L. Zingales, 1995, What do we know about capital structure? Some evidence from
international data, JF 50, 1421-1460.
Ross, S.A., 1977, The determinants of financial structure: The incentive-signaling approach, BJE 8(1),
Shyam-Sunder, L. and S.C. Myers, 1999, Testing static-tradeoff against pecking order models of capital
structure, JFE 51(2), 219-244.
Titman, S., 1984, The effect of capital structure on a firm’s liquidation decision, JFE 13, 137-151.
Titman, S. and R. Wessels, 1988, The determinants of capital structure choice, JF 43, 1-19.
Lecture #4, Sep 27: Dividend Policy and Equity Management: Splits and Share
Amihud, Y. and K. Li, 2006, The Declining Information Content of Dividend Announcements and the
Effects of Institutional Holdings, JF, pp. 637-660
Asquith, P. and D.W. Mullins, 1983, The impact of initiating dividend payments on stockholder wealth,
JB 56(1), 640-659.
** Benartzi, S., Michaely R. and R. Thaler, 1997, Do changes in dividends signal the future or the past?,
JF 52(3), 1007-1033.
Black, F., 1976, The Dividend Puzzle, JPM, 2, 5-8
Fama, E., and K.R. French, 2001, Disappearing dividends: changing firm characteristics or lower
propensity to pay? JFE 60(1) 3-43.
Healy, P.M. and K. Palepu, 1988, Earnings information conveyed by dividend initiations and omissions,
JFE 21, 149-175.
Kalay, A., and R. Michaely, 2000, Dividends and Taxes: A Re-examination, FM 29(2) 55-75.
Lie, E. and J.J. McConnell, 1998, Earnings signals in fixed price and Dutch auction self-tender offers,
JFE 49(2), 161-186.
Michaely, R., R.H. Thaler and K.L. Womack, 1995, Price Reactions to dividend initiations and
Omissions: Overreaction or drift? JF 50(2), 573-608.
** Miller, M. and F. Modigiani, 1961, Dividend policy, growth and the valuation of shares, JB 34, 411-
Miller, M. and M. Scholes, 1978, Dividends and taxes, JFE 6, 333-364.
** Miller, M. and K. Rock, 1985, Dividend policy under asymmetric information, JF 40, 1031-1051
Nohel, T. and V. Tarhan, Share repurchases and firm performance: New evidence on agency costs of
free cash flow, JFE 49(2), 187-222.
Lecture #5 & 6, Oct 4 and Oct 11: Equity Financing Decisions
Asquith, P. and D.W. Mullins, 1986, Equity issues and offerings dilutions, JFE Jan/Feb 61-90.
Brav, A., and P. Gompers, 1997, Myth or reality? The long-run underperformance of initial public
offerings: Evidence from venture and non-venture capital-backed companies, JF 52(5) 1791-
Brau, J.C. and S.E. Fawcett, 2006, Initial Public Offerings: An Analysis of Theory and Practice, Vol.
61(1), pp. 399 – 436
Boehmer, B., E. Boehmer and R.P.H.Fishe, 2006, Do Institutions Receive Favorable Allocations in IPOs
with Better Long-Run Returns?, JF, pp. 809–828
Chang, X., S. Dasgupta and G. Hillary, 2006, Analyst Coverage and Financing Decisions, JF, Vol.
Ellul, A. and M. Pagano, 2006, IPO Underpricing and After-Market Liquidity, RFS, Vol. 19, pp. 381-
Kim, M. and J. Ritter, 1999, Valuing IPOs, JFE 53(3), 409-438.
Loughran, T. and J. Ritter, 1995, The new issues puzzle, JF 50(1), 23-51.
Loughran, T. and J. Ritter, 1997, The operating performance of firms conducting seasoned equity
offerings, JF 52(5), 1823-1850.
Michaely, Roni and W. Shaw, 1994, The pricing of initial public offerings: Tests of adverse selection
and signaling theories, RFS 7(2), 279-319.
Mikkelson, W., M.M. Partch and K. Shah, 1997, Ownership and operating performance of companies
that go public, JFE 44(3) 281-308.
** Myers, S.C. and N.S. Majluf, 1984, Corporate finance and investment decisions when firms have
information that investors do not have, JFE 13, 187-221.
Pagano, M., F. Panetta and L. Zingales, Why do companies go public? An empirical analysis, JF 53(1)
Rajan, R. and H. Servaes, 1997, Analysts following of initial public offerings, JF 52(2), 507-530.
** Rock, K., 1986, Why new issues are underpriced, JFE 15(1/2), 187-212.
Spiess, D.K. and J. Affleck-Graves, 1995, Underperformance in long-run stock returns following
seasoned equity offerings, JFE 38(3), 243-267.
Lecture #7, Oct 18: Reading day (no class)
Lecture #8, Oct 25: Debt Financing Decisions
** Barclay M. and C. Smith, 1995, The Maturity Structure of Corporate Debt, JF, vol 50, 609-632.
Datta S., Iskandar-Datta M., and A. Patel, The Pricing of Initial Public Offers of Corporate Straight
Debt, JF, vol 52(1), 379-396.
** Diamond D., 1991, Monitoring and Reputation: The Choice between Bank Loans and Direct Placed
Debt, JPE, Vol. 99, pp. 689-721.
Diamond D., 1993, Seniority and Maturity of Debt Contracts, JFE, vol 33, 341-368.
Houston J. and C. James, 1996, Bank Information Monopolies and the Mix of Private and Public Debt
Claims, JF vol. 51(5), 1863-1889.
James, C., 1987, Some Evidence on the Uniqueness of Bank Loans, JFE vol 19, 217-236.
Rajan R., 1992, Insiders and Outsiders: The Choice between Relationship and Arms-Length Debt, JF
vol. 47, 1367-1400.
Scherr, F.C., and H.M.Hulburt, 2001, The Debt Maturity Structure of Small Firms, FM 30(1) 85-112.
** Stoh, M;H. and D.C. Mauer, 1996, The Determinants of Corporate Debt Maturity Structure, JB
Lecture #9, Nov 1: Mergers and acquisitions – classical theories
Amihud, Y. and B. Lev, “Risk reduction as a managerial motive for conglomerate mergers”, Bell
Journal of Economics, 12(1981).
** Bradley, Michael, Anand Desai and E. Han Kim, “The rationale behind interfirm tender offers:
information or synergy”, JFE 1983.
Caves, Richard E. “Mergers, takeovers, and economic efficiency”, International Journal of Industrial
Eckbo, B. Espen, “Mergers and the market concentration doctrine: evidence from the capital market”,
Halpern, Paul, “Corporate acquisition: a theory of special cases? A review of event studies applied to
acquisitions”, JF 38 (1982).
Ippolito, Richard A. and William H. James, “LBOs, Reversions and Implicit Contracts”, JF, 1992.
** Jensen, M, “Agency costs of free cash flow, corporate finance and takeovers”, American Economic
Lease, Ronald C., John J. McConnell and Wayne H. Mikkelson, “The market value of control in
publicly traded corporations”, JFE 11(1983).
Mikkelson, Wayne H. and M. Megan Partch, “The decline of takeovers and disciplinary managerial
turnover”, JFE, 44(1997).
Mitchell, Mark L. and Kenneth Lehn, “Do bad bidders become good targets?”, Journal of Political
Morck, Randall, Andrei Shleifer, and Robert W. Vishny, “Do managerial objectives drive bad
acquisitions”, JF 1990.
** Roll, Richard, “The hubris hypothesis of corporate takeovers”, JB 59(1986).
Stoughton, Neal M. “The information content of corporate merger and acquisition offers”, JFQA
Varaiya, Nikhil P. and Kenneth R. Ferris, “Overpaying in corporate takeovers: the winner’s curse”,
Financial Analysts Journal, 1987.
Lecture #10, Nov 8: Mergers and acquisitions – empirical evidence
Bhagat, Sanjai, et al “Hostile takeover in the 1980’s: the return to corporate specialization”, Brookings
papers on economic activity: Microeconomics, 1990.
** Berkovitch, Elazar and M. P. Narayanan, “Motives for takeovers: an empirical investigation”, JFQA
Betton, Sandra and B. Espen Eckbo, Toeholds, bid jumps, and expected payoffs in takeovers, Review of
Financial Studies, 2000 Vol. 13, pp. 841-882
Comment, Robert and G. William Schwert, “Poison or placebo? Evidence on the deterrence and wealth
effects of modern antitakeover measures”, JFE 19(1995).
Holderness, Clifford G. and Dennis P. Sheehan, “Raiders or saviors? The evidence on six controversial
investors”, JFE, 14(1985).
** Jensen, Michael C. and Richard S. Ruback, “The market for corporate control: the scientific
evidence”, JFE 11(1983).
Kaplan, Steven N. and Michael S. Weisbach, “The success of acquisitions: evidence from divestitures”,
Loughran, Tim and Anand M. Vijh, “Do long-term shareholders benefit from corporate acquisitions”, JF
Lys, Thomas and Linda Vincent, “An analysis of value destruction in AT&T’s acquisition of NCR”, JFE
Meulbroek, Lisa K., Mark L. Mitchell, J. Harold Mulherin, Jeffry M. Netter, and Annette B. Poulsen,
“Shark repellents and managerial myopia: an empirical test”, JPE 1990.
** Moeller, Sara B., Frederik P. Schlingemann and Rene M. Stulz, “Wealth destruction on a massive
scale? A study of acquiring-firm returns in the recent merger wave”, JF, 2004
Rhodes-Kropt, Matthew, David T. Robinson and D. Viswnanthan, “Valuation waves and merger
activity: the empirical evidence”, JFE 2005.
Ruback, Richard S., “The Conoco takeover and stock holder returns”, Sloan Management Review,
Schleifer, Andrei and Robert W. Vishny, “Takeovers in the ‘60s and ‘80s: Evidence and Implications”,
Strategic Management Journal 12(1991).
Schwert, G. William , “Hostility in takeovers: in the eyes of the beholder”, 1999, in class folder.
** Schwert, G. William, “Markup pricing in mergers and acquisitions”, JFE 41(1996).
Allen, Franklin and Stephen Morris, “Finance applications of game theory”, Wharton Financial
Institutions Center Working Paper, September 1998..
Comment, Robert and Gregg A. Jarrell, “Two-tier and negotiated tender offers: the imprisonment of the
free-riding shareholder”, JFE, 19(1987).
** Fishman, Michael J., “A theory of preemptive takeover bidding”, RAND Journal of Economics
Giammarino, Ronald M. and Robert L. Heinkel, “A model of dynamic takeover behaviour”, JF,
** Grossman, Sanford J. and Oliver D. Hart, “Takeover bids, the free-rider problem in takeovers”, Bell
Journal of Economics, 11(1980).
Hirshleifer, David and I. P. L. Png, “Facilitation of competing bids and the price of takeover targets”,
Review of Financial Studies 2(1989).
Holmstrom, Bengt and Barry Nalebuff, “To the raider goes the surplus? A reexamination of the free-
rider problem?, Journal of Economics & Management Strategy, 1(1) Spring 1992 pp 37-62.
Klemperer, Paul, “Auction theory: a guide to the literature”, Journal of Economic Surveys 13(1999), in
Lehn, Kenneth M. and Mengxin Zhao, 2006, CEO Turnover after Acquisitions: Are Bad Bidders Fired?
Journal of Finance, Vol. 61(4), pp. 1759 - 1811
Romp, Graham, Game Theory: Introduction and Applications, Chapters 1-3, 1997. On reserve in the
Shleifer, Andrei and Robrt W. Vishny, “Large shareholders and corporate control”, Journal of Political
Lecture #11, Nov 15: Corporate governance
Agrawal, Anup, Jeffrey F. Jaffe and Jonathan M. Karpoff, “Management turnover and governance
changes following the revelation of fraud”, JLE 1999.
Agrawal, Anup, and Charles R. Knoeber, “Firm performance and mechanisms to control agency
problems between managers and shareholders”, JFQA 31(1996).
Billett, Matthew T. and David C. Mauer, “Diversification and the value of internal capital markets: the
case of tracking stock”, working paper, in class folder
Fama, Eugene, “Agency problems and the theory of the firm”, Journal of Political Economy, 88(1980).
Fama, Eugene and M. C. Jensen, “Separation of ownership and control”, JLE 1983.
Gompers, Paul A., Joy L. Ishii and Andrew Metrick, “Corporate governance and equity prices”,
Quarterly Journal of Economics 118 (2003).
** Jensen, M, and W. Meckling, “Theory of the firm: managerial behavior, agency costs and ownership
structure:, JFE 3(1976).
Jensen, Michael C., and Richard S. Ruback, eds, “Symposium on the structure and governance of
enterprise”, JFE, 27(1990).
Logue, Dennis E., James K. Seward, and James P. Walsh, “Rearranging residual claims: a case for
targeted stock”, Financial Management, 25(1996).
McConnell, J. and H. Servaes, “Equity ownership and the two faces of debt”, JFE, 39(1995)
McConnell, J. and H. Servaes, “Additional evidence on equity ownership and corporate value”, JFE
Panasian, C., A. Prevost, and H.S. Bhabra, “Board Composition and Firm Performance: An Examination
of the Impact of the Dey Committee Report, The Financial Review, forthcoming
** Schleifer, A. and R.Vishny, “A survey of corporate governance”, JF, 52(1997).
Stulz, R. M., “Managerial control of voting rights: financing policies and the market for corporate
control”, JFE, 20(1988).
Weisbach, M., “Outside directors and CEO turnover”, JFE, 20(1988).
** Zingales, Luigi, “Corporate Governance”, New Palgrave Dictionary of Economics and Law, 1997.
Lecture #12, Nov 22: Executive compensation
Haubrich, Joseph G., “Risk aversion, performance pay, and the principal-agent problem”, Journal of
Political Economy, 102(1994).
Jensen, Michael C., and Kevin J. Murphy, “Performance Pay and Top-management incentives”, Journal
of Political Economy, 98 (1990).
Murphy, K., “Corporate performance and managerial remuneration”, Journal of Accounting and
** Murphy, K., “Executive compensation”, 1998, available in class folder
Lecture #13, Nov 29: Research paper presentations