Credits: 15
Module Convenor: Dr Radoslawa Nikolowa
This module aims to develop your understanding of how firms raise external finance and design their capital structure. In the first three lectures we will examine the assumption that the firm's cash flows are exogenous with respect to financial decisions. In his framework you will study the Modigliani- Miller theorems stating which conditions make capital structure irrelevant, and derive the optimal debt/equity mix in the presence of taxes and costly bankruptcy. The rest of the module addresses the issue of how a firm's financial and governance structure affects its value once information problems between firms' insiders and investors are taken into account. We first focus on the incentives of the firm's insiders and study how capital structure impacts their agency relationship with outside investors; we then turn to outsiders' incentives, recognising that investors play an important monitoring role in the firms they fund. We then study models linking security returns and control rights. Finally, the interaction between firms' financial decisions and product market behaviour is addressed.
Assessment: 80.0% Examination, 20.0% Coursework