Lahore University of Management Sciences

Econ 469 Advanced Corporate Finance Spring 2012-2013 Instructor Dr. Hammad Siddiqi Room No. 243 Economics Wing Office Hours To be announced in class Email hammad@lums.edu.pk Telephone Secretary/TA TA Office Hours Course URL (if any) Course Basics Credit Hours 4 Lecture(s) Nbr of Lec(s) Per Week 2 Duration 100 minutes Recitation/Lab (per week) Nbr of Lec(s) Per Week Duration Tutorial (per week) Nbr of Lec(s) Per Week Duration Course Distribution Core Elective Elective Open for Student Category Close for Student Category COURSE DESCRIPTION Corporate finance is the study of decision-making in corporations and financial markets. Traditionally, people making such decisions are considered to be emotionless geniuses leading to a rather simplified view of finance in particular and economics in general. In reality, people have emotions as well as limited reasoning ability. The growing recognition of this fact has led to the field of behavioral finance with an objective of developing a more realistic and psychologically relevant picture of human behavior. The objective of this course is to illustrate the power of economic way of thinking (both behavioral and traditional) in the domain of decisions made by stakeholders in firms and financial markets. COURSE PREREQUISITE(S)

None

COURSE OBJECTIVES

See course description above

Lahore University of Management Sciences

Learning Outcome

See module and course description above.

Grading Breakup and Policy Quiz(s): 20% Midterm Examination: 40% Final Examination: 40%

Examination Detail

Midterm Exam

Yes Duration:100 minutes : Exam Specifications: Closed Books/Closed Notes/Calculator allowed

Final Exam

Yes Duration: 100 minutes Exam Specifications: Closed Books/Closed Notes/Calculator allowed

COURSE OVERVIEW

The course is divided into 5 modules: Module 1: Information Asymmetry (when one party has more information) Pre-behavioral finance (or traditional finance) has been quite successful in analyzing situations in which one party has more information than others. Potential explanations offered by traditional finance for the following will be discussed:

1) Debt-equity mix of firms. 2) Why do firms give out dividends? 3) Why does a unique trading mechanism call badla exist in Pakistan?

However, in order to understand these questions, some training in basic game theory is needed. Essential game theory will be discussed first before attempting to answer the above questions. Game theory material (available from LMS):

1) Chapters 1 and 2 of Games and Information by Eric Rasmusen. 2) Stripped down poker: A Classroom game with signaling and bluffing by David. H Reily, Micheal, B. Urbancic, and Mark

Walker Module 2: Experimental Finance A First Look Experiments are now an established way of probing human behavior in various contexts relevant to decision making in corporations and financial markets. In this module, two recent experiments will be replicated and discussed in class to illustrate how insights from psychology are relevant for the study of finance. The reading material for this section will be uploaded to Learning Management System (LMS) and consists of:

Lahore University of Management Sciences

Siddiqi, H. (2012), The relevance of thinking-by-analogy for investors willingness-to-pay. Journal of Economic Psychology. Siddiqi, H. (2009), Is the lure of choice reflected in market prices? Experimental evidence based on the 4-Door Monty Hall problem. Journal of Economic Psychology. Module 3: Behavioral Finance

Representativeness and Bayes Rule: Psychological Perspective (Chapter 2 of Shefrin (2008)) Representativeness and Bayes Rule: Economic Perspective (Chapter 3 of Shefrin (2008)) Valuation with Representativeness (chapter 4 of Shefrin (2008)) Valuation with Heterogeneous judgments (Chapter 5 of Shefrin (2008))

Module 4: Corporate Financing and Agency Costs

Outside Financing Capacity (Chapter 3 of Tirole) Some Determinants of Borrowing Capacity (Chapter 4 of Tirole) Liquidity and Risk Management (Chapter 5 of Tirole)

Module 5: Takeovers, and Mergers and Acquisitions (Chapters 11 and 14 of Tirole) Textbook(s)/Supplementary Readings Note: The reading material for module 1 and module 2 will be available through LMS and the reading material for modules 3, 4, and 5 will be available through the photocopier. Texts The Theory of Corporate Finance, Jean Tirole. Princeton University Press 2005. A Behavioral Approach to Asset Pricing, Hersh Shefrin. Academic Press Elsevier 2008