FINANCIAL ECONOMICS II Spring 2003 Franklin Allen Department of Finance, Stern School of Business and Douglas Gale Department of Economics, Faculty of Arts and Sciences

This course is intended to give Ph. D. students an advanced course in Corporate Finance. The approach will be to first develop theoretical tools and then show how they can be applied to analyze the financial decisions of the firm. The usual prerequisites are the core courses for the Ph.D. The course will start on Wednesday January 22. Lectures will be held in Room 715, 269 Mercer Street, on Wednesday and Friday at 10:00 AM. The final assessment for the course will be based on a final exam (50%) and a term paper (50%), which can be written during the summer.

Course Outline Topic 1: What is Corporate Finance? (2 sessions) This section will provide an overview of the topic. In particular it will contrast what will be covered in the course and what is typically covered in an MBA Corporate Finance Course.

Topic 2: General Equilibrium Models of Corporate Finance (1-2 sessions)

Spanning, unanimity, and the firm's objective function The Modigliani-Miller theorem, capital structure, and payout policy Market incompleteness, taxes and bankruptcy Topic 3: Contract Theory I: The Principal-Agent Problem (4 sessions) Incentive effects of debt and equity Risk shifting Free cash flow Optimal separation of ownership and control Executive compensation Topic 4: Contract Theory II: Renegotiation and Dynamic Contracting (2 sessions) Dynamic theories of capital structure Incomplete contracts Topic 5: Signaling Games (2-3 sessions) Capital structure Dividends Security design Credit rationing Topic 6: Liquidity and Corporate Finance (4-6 sessions) Flexibility of financing modes Firm decisions and intersectoral flows of funds Bankruptcy and liquidity Security design and liquidity Topic 7: Corporate governance (3 sessions) Separation of ownership and control Internal versus external finance Takeovers Competition and corporate governance Law and finance Topic 8: Behavioral Corporate Finance (2 sessions) Dividend policy and self-control Takeovers Investment decisions and overconfidence