Theoretical Foundations of Corporate Finance

International Studen

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By: Joao Amaro de Matos

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Published: 25th November 2001

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Corporate finance is the area of finance that studies the determinants of firms' values, including capital structure, financing, and investment decisions. Although there are several excellent texts in corporate finance, this is the first to focus on the theoretical foundations of the subject in a consistent and integrated way at the Ph.D. level. In addition to a textbook for advanced graduate students, it can also serve as a general reference to researchers and sophisticated practitioners.

The material presented is carefully selected with an eye to what is essential to understanding the underlying theory, ensuring that this text will remain useful for years to come. The book is divided into three parts. The first section presents the basic principles of valuation based on the absence of arbitrage, including a discussion of the determinants of the optimal capital structure based on the seminal results of Modigliani and Miller. The second section discusses the implications of agency problems and information asymmetries to capital structure, giving particular attention to payout policy and to debt contract design. The concluding portion presents different ways of restructuring capital, including going public, going private using stock repurchases or leveraged buyouts, and mergers and acquisitions. Each chapter includes exercises that vary in difficulty, with suggested solutions provided in an appendix.

This book will assuredly be the standard doctoral- and professional-level explication of corporate finance theory and its appropriate applications.

List of Figures	p. xi
Preface	p. xiii
Intended Audience	p. xiv
Organization of the Text	p. xv
Acknowledgments	p. xvi
Foundations	p. 1
Valuation	p. 3
Valuation under Certainty	p. 5
The Robinson Crusoe Economy	p. 5
Time Preferences	p. 7
Production Opportunities	p. 8
The Role of Capital Markets	p. 9
Consumption and Investment with Capital Markets	p. 11
The Value of an Investment Project	p. 14
Multiperiod Economy with Capital Markets	p. 15
Exercises	p. 17
Valuation under Uncertainty	p. 18
One-Period Model	p. 18
Value and the Absence of Arbitrage	p. 22
Arbitrage Opportunities and Investment	p. 23
Value and the Martingale Measure	p. 24
Beta Values	p. 26
Exercises	p. 28
Multiperiods and Flexibility under Uncertainty	p. 29
The Multiperiod Setting	p. 30
Real Options	p. 33
Some General Properties of Options	p. 34
Exercises	p. 37
Optimal Capital Structure	p. 39
The MM Propositions	p. 40
The Irrelevancy Statement	p. 40
Cost of Capital	p. 42
The MM Propositions with Taxes	p. 44
Empirical Evidence	p. 46
Exercises	p. 47
Personal and Corporate Taxation	p. 48
Demand for Bonds	p. 49
Supply of Bonds	p. 50
The Equilibrium	p. 51
Comparing with MM	p. 53
Changes in Taxations: An Alternative Equilibrium	p. 54
Empirical Evidence	p. 57
Exercises	p. 58
Agency and Information	p. 59
Implications for Capital Structure	p. 61
The Role of Agency Costs	p. 62
Agency Costs of Outside Equity	p. 64
Principal-Agent Problems	p. 66
Agency Costs of Debt	p. 71
Empirical Evidence	p. 75
Exercises	p. 77
Informational Asymmetries	p. 78
Managers' Signaling because of Fee Schedules	p. 79
When Managers Are Also Investors	p. 82
Signals Conditioned by Investment Opportunities	p. 85
Stock Repurchase as a Signal	p. 89
Empirical Evidence	p. 93
Exercises	p. 95
Payout Policy	p. 97
Dividend Policy	p. 98
Another Irrelevancy Proposition	p. 98
Alternative Valuations	p. 100
Growth Rates	p. 102
Relaxing Certainty	p. 103
Dividends and Taxes	p. 104
Empirical Evidence	p. 105
Exercises	p. 109
Dividends and Information	p. 110
The Informational Content of Dividends	p. 110
A Signaling Model	p. 111
A Consistent Signaling Model	p. 114
Empirical Evidence	p. 116
Exercises	p. 119
Stock Repurchases	p. 119
Trends in Payout Policies	p. 120
Reasons for Stock Repurchases	p. 121
Empirical Evidence	p. 122
Financial Contracting	p. 125
Contracting and Allocation of Control	p. 126
The Model	p. 127
Entrepreneur Control	p. 129
Investor Control	p. 131
Contingent Control	p. 133
Financing Contracts	p. 133
Exercises	p. 134
Debt Contract Design	p. 134
Extending the Model	p. 134
The Case of Many Creditholders	p. 137
The Choice of the Duration	p. 139
The Effect of Seniority	p. 146
Exercises	p. 148
Capital Restructuring	p. 149
Going Public	p. 151
The Going Public Decision	p. 152
The Model	p. 152
The Equilibrium	p. 154
Empirical Evidence	p. 160
Exercises	p. 160
Underpricing and Information Asymmetries	p. 160
Asymmetry between Issuers and Underwriters	p. 162
Asymmetry between Investors	p. 163
Reputation of Bankers and Uncertainty	p. 165
How Underwriters Become Informed	p. 167
Legal Liabilities	p. 171
Empirical Evidence	p. 172
Exercises	p. 175
Going Private	p. 177
Stock Repurchases	p. 177
Leveraged Buyouts	p. 179
The Mechanism of Leveraged Buyouts	p. 179
A Model for MBOs	p. 181
Empirical Evidence	p. 186
Exercises	p. 189
Mergers and Acquisitions	p. 191
Tender Offers and the Free-Rider Problem	p. 192
Largely Diffused Ownership	p. 193
The Role of a Large Shareholder	p. 196
Uncertain Outcome of a Takeover	p. 199
The Optimal Size of [alpha] before a Takeover	p. 201
Exercises	p. 205
Merger Bids	p. 205
Competition between Bidders	p. 206
Choosing the Means of Payment	p. 207
Cash as a Preemptive Instrument with Many Bidders	p. 212
The Choice of Takeover Methods	p. 214
Empirical Evidence	p. 218
Exercises	p. 223
Appendices	p. 225
Optimization Principles	p. 227
Unconstrained Optimization	p. 227
Constrained Optimization	p. 228
Equality Constraints	p. 228
Inequality Constraints	p. 231
Notions of Game Theory	p. 233
Introduction	p. 233
Informational Equilibrium	p. 234
The Revelation Principle	p. 238
Suggested Solutions	p. 241
Valuation	p. 241
Valuation under Certainty	p. 241
Valuation under Uncertainty	p. 244
Valuation of Flexibility	p. 250
Optimal Capital Structure	p. 251
The MM Propositions	p. 251
Personal and Corporate Taxation	p. 255
Implications for Capital Structure	p. 255
The Role of Agency Costs	p. 255
Informational Asymmetries	p. 260
Payout Policy	p. 261
Dividend Policy	p. 261
Dividend and Information	p. 263
Financial Contracting	p. 266
Contracting and Allocation of Control	p. 266
Debt Contract Design	p. 267
Going Public	p. 268
The Going Public Decision	p. 268
Underpricing and Information Asymmetries	p. 268
Going Private	p. 270
Leveraged Buyouts	p. 270
Mergers and Acquisitions	p. 271
Tender Offers and Free-Rider Problem	p. 271
Merger Bids	p. 276
Notes	p. 279
Bibliography	p. 285
Index	p. 297
Table of Contents provided by Syndetics. All Rights Reserved.

ISBN: 9780691087948
ISBN-10: 0691087946
Series: International Studen
Audience: Tertiary; University or College
Format: Hardcover
Language: English
Number Of Pages: 320
Published: 25th November 2001
Country of Publication: US
Dimensions (cm): 23.62 x 16.26 x 2.29
Weight (kg): 0.61