2015 annual performance review usc m · 2017-04-07 · report generated on january 18, 2017 page 1...

Report Generated on January 18, 2017 of 9

2015 ANNUAL PERFORMANCE REVIEW USC MARSHALL SCHOOL OF BUSINESS

Name Oguzhan Ozbas Department Uncategorized Department I. FACULTY WORKLOAD PROFILE (using 9 pt. scale) Workload Profile (2016-2017)

Teaching Points: 3 Teaching Description:

- TOP-TO-BOTTOM REVISION TO INTRODUCE HBS FIN 2 CASES Fall 2016 GSBA 521B Corporate Finance: Financial Policies and Applications (3 Core Sections)

- Fall 2016 FBE 652 Financial Economics I (co-teach with John Matsusaka)

- Spring 2017 FBE 630 Fundamentals of Corporate Finance

Research Points: 5 Research Description:

Service Points: 1 Service Description:

- Area director for doctoral program (co-direct with John Matsusaka)

- Recruiting committee for rookie candidates

- Recruiting committee for seasoned and senior candidates Workload Profile (2015-2016)

Teaching Points: 3 Teaching Description:

- NEW PREP Fall 2015 BUAD 306 Business Finance

- NEW PREP Fall 2015 GSBA 521B Corporate Finance: Financial Policies and Applications (3 Core Sections)

- Fall 2015 FBE 652 Financial Economics I (co-teach with John Matsusaka)

Research Points: 5 Research Description:


Service Points: 1 Service Description:

- Area director for doctoral program (co-direct with John Matsusaka)

- Finance doctoral program revision (one-year process)

- Recruiting committee for rookie candidates

- Recruiting committee for seasoned and senior candidates II. TEACHING Courses taught during January 1, 2015 through December 31, 2016 Fall 2016 FBE 652, "Financial Economics I" Class Number 15490, 3.0 Units Official Enrollment Number: 10 Number Responding to course evaluation: 7 Instructor Rating (Q11): 4.86 Course Rating (Q12): 4.86 Comments: Fall 2016 GSBA 521, "Corporate Finance: Financial Policies and Applications" Class Number 15659, 3.0 Units Official Enrollment Number: 73 Number Responding to course evaluation: 61 Instructor Rating (Q11): 3.92 Course Rating (Q12): 3.64 Comments: Fall 2016 GSBA 521, "Corporate Finance: Financial Policies and Applications" Class Number 15660, 3.0 Units Official Enrollment Number: 73 Number Responding to course evaluation: 57 Instructor Rating (Q11): 4.04 Course Rating (Q12): 3.75 Comments: Fall 2016 GSBA 521, "Corporate Finance: Financial Policies and Applications" Class Number 15661, 3.0 Units Official Enrollment Number: 75 Number Responding to course evaluation: 55 Instructor Rating (Q11): 3.96 Course Rating (Q12): 3.85 Comments:


Fall 2015 BUAD 306, "Business Finance" Class Number 14785, 4.0 Units Official Enrollment Number: 71 Number Responding to course evaluation: 31 Instructor Rating (Q11): 4.16 Course Rating (Q12): 3.90 Comments: Fall 2015 FBE 652, "Financial Economics I" Class Number 15490, 3.0 Units Official Enrollment Number: 9 Number Responding to course evaluation: 6 Instructor Rating (Q11): 4.83 Course Rating (Q12): 4.67 Comments: Fall 2015 GSBA 521, "Corporate Finance: Financial Policies and Applications" Class Number 15659, 3.0 Units Official Enrollment Number: 71 Number Responding to course evaluation: 45 Instructor Rating (Q11): 2.73 Course Rating (Q12): 2.67 Comments: Fall 2015 GSBA 521, "Corporate Finance: Financial Policies and Applications" Class Number 15660, 3.0 Units Official Enrollment Number: 68 Number Responding to course evaluation: 44 Instructor Rating (Q11): 2.50 Course Rating (Q12): 2.43 Comments: Fall 2015 GSBA 521, "Corporate Finance: Financial Policies and Applications" Class Number 15661, 3.0 Units Official Enrollment Number: 69 Number Responding to course evaluation: 53 Instructor Rating (Q11): 2.91 Course Rating (Q12): 2.74 Comments: Teaching-related awards and honors received: Academic Advising: Involvement with Ph.D. students

PhD Student Vuk Talijan Home Department Finance and Business Economics


My Role Member, Dissertation Committee Dates September 2015 - Present

PhD Student Irene Yi Home Department Finance and Business Economics My Role Member, Dissertation Committee Dates September 2014 - Present

PhD Student Garrett Swanburg Home Department Finance and Business Economics My Role Member, Dissertation Committee Dates June 2012 - May 2015

PhD Student Sakya Sarkar Home Department Finance and Business Economics My Role Member, Dissertation Committee Dates June 2012 - May 2015

Teaching-Related Faculty Mentoring Activities Executive Education and Other Non-Credit Teaching: III. RESEARCH AND SCHOLARSHIP Papers, Books, or Book Chapters Published or Accepted

Refereed Journal Articles

Journal Article, Academic Journal (Accepted) Matsusaka, J. G., Ozbas, O. (2016). A Theory of Shareholder Approval and Proposal Rights. Journal of

Law, Economics, and Organization (conditionally accepted). Journal Article, Academic Journal (Published September 2014) Ozbas, O., Marino, A. M. (2014). Disclosure of Status in an Agency Setting. Journal of Economic

Behavior and Organization, 105, 191‐207.

Papers, Books, or Book Chapters In-Progress

Working Paper (Working Paper) Matsusaka, J. G., Ozbas, O., Yi, I. (2016). Opportunistic Proposals by Union Shareholders. Working Paper (Working Paper) Demiroglu, C., Ozbas, O., Silva, R. C., Ulu, M. F. (2016). The Economic Impact of Religion: Evidence

from Ramadan Loans. Working Paper (Working Paper) Matsusaka, J. G., Ozbas, O., Yi, I. (2016). Why Do Managers Fight Shareholder Proposals? Evidence

from No‐Action Letter Decisions. Manuscript (Working Paper) Ozbas, O., Rantakari, H. (2015). Information Acquisition, Resource Allocation and Managerial

Incentives. Under submission


Explanation of research productivity Presentations and Conferences:

Conference on Empirical Legal Studies, Duke University, Durham, NC, "Opportunistic Proposals by

Union Shareholders", Presenter. (November 2016). NBER Corporate Finance Meeting, Cambridge, MA, Attendee. (November 2016). Workshop on Corporate Governance and Investment, Sabancı University, Istanbul, Turkey,

"Opportunistic Proposals by Union Shareholders", Presenter. (September 2016). Workshop on Corporate Governance and Investment, Istanbul, Turkey, "The Effects of Business

Group Affiliation: Evidence from Firms Being “Left Alone”", Discussant. (September 2016). FOM Conference, Dartmouth College, Hanover, NH, Attendee. (August 2016). NBER Summer Institute Corporate Finance, Cambridge, MA, Attendee. (July 2016). Financial Intermediation Research Society Meetings, Lisbon, Portugal, "Hard Marriage with Heavy

Burdens: Labor Unions as Takeover Deterrents", Discussant. (June 2016). FMA European Doctoral Student Consortium, Helsinki, Finland, "Panelist". (June 2016). Western Finance Association Meetings, Park City, UT, Attendee. (June 2016). Society for Financial Studies Finance Cavalcade, Toronto, Canada, "Corporate Investment and Capital

Allocation", Session Chair. (May 2016). Financial Management Association Annual Meeting, Orlando, FL, "Track Chair", Session Chair.

(October 2015). FOM Conference, University of Chicago, Chicago, IL, Attendee. (October 2015). NBER Summer Institute Corporate Finance, Cambridge, MA, Attendee. (July 2015). Sabancı University, Istanbul, Turkey, "Changing Capital Markets and Mandatory Proxy Voting",

Presenter. (June 2015). Western Finance Association Meetings, "Economic Linkages Inferred from News Stories and the

Predictability of Stock Returns", Discussant. (June 2015). Özyeğin University, Istanbul, Turkey, "Executive Compensation and Deployment of Corporate

Resources: Evidence from Working Capital", Presenter. (June 2015). G20‐OECD Corporate Governance Forum, Istanbul, Turkey, "Panelist", Discussant. (April 2015).

USC Seminar Participation in 2015 - 2016

Applied Economics Workshop Typical Participation: Occasionally


FBE Brown‐Bag Seminar Typical Participation: Almost Always Finance Seminar Series Typical Participation: Almost Always Applied Economics Workshop Typical Participation: Occasionally FBE Brown‐Bag Seminar Typical Participation: Almost Always Finance Seminar Series Typical Participation: Almost Always Applied Economics Workshop Typical Participation: Occasionally FBE Brown‐Bag Seminar Typical Participation: Almost Always Finance Seminar Series Typical Participation: Almost Always

Research-Related awards and honors received: Research-Related Faculty Mentoring Activities Research Funding during 2015 - 2016 IV. SERVICE Departmental Service

Departmental, Finance Seasoned and Senior Faculty Recruiting Committee. (August 2015 ‐ Present). Departmental, 2nd Year Doctoral Qualifying Exam Committee, Member. (2003 ‐ Present).

Write and grade qualifying exams for doctoral students. Departmental, Finance Rookie Faculty Recruiting Committee. (November 2016 ‐ February 2017). Departmental, P‐PEG Committee ‐ Renée Adams. (March 2016 ‐ April 2016).

Member of Renée Adams' P‐PEG with John Matsusaka Departmental, Finance Doctoral Admissions Committee. (January 2016 ‐ April 2016). Departmental, Finance Rookie Faculty Recruiting Committee. (November 2015 ‐ February 2016). Departmental, P‐PEG Committee ‐ Chris Parsons. (January 2016).

Member of Chris Parsons' P‐PEG committee with Harry DeAngelo

Marshall School Service.


School, Committee on Doctoral Program. (August 2015 ‐ Present).

Co‐direct John Matsusaka School, PEG Committee ‐ Maria Ogneva. (August 2016 ‐ September 2016).

Member of Maria Ogneva's PEG committee with Randolph Beatty (Chair) and Mark Soliman

University Service Student Organizations Professional Service

Editorial and Refereeing Activities

"American Economic Review", Ad Hoc Reviewer, Papers. "Emerging Markets Finance and Trade", Ad Hoc Reviewer, Papers. "Journal of Accounting and Economics", Ad Hoc Reviewer, Papers. "Journal of Economic Behavior and Organization", Ad Hoc Reviewer, Papers. "Journal of Economics and Management Strategy", Ad Hoc Reviewer, Papers. "Journal of Financial and Quantitative Analysis", Ad Hoc Reviewer, Papers. "Journal of Financial Economics", Ad Hoc Reviewer, Papers. "Journal of Law, Economics and Organization", Ad Hoc Reviewer, Papers. "Quarterly Journal of Economics", Ad Hoc Reviewer, Papers. "RAND Journal of Economics", Ad Hoc Reviewer, Papers. "Review of Finance", Ad Hoc Reviewer, Papers. 2017 WFA Program Comittee. (December 2016 ‐ January 2017).

Member of the program committee 2016 Napa Conference on Financial Markets Program Committee. (November 2016 ‐ December

2016). Member of program committee

"Review of Financial Studies", Ad Hoc Reviewer, Papers. (November 2016). 2016 FMA Best Paper for Corporate Finance Selection Committee. (July 2016 ‐ August 2016).

Member 2016 WashU CFAR Program Committee. (July 2016 ‐ August 2016).

Member of program committee


"Research Grants Council of Hong Kong", Ad Hoc Reviewer, Papers. (April 2016). 2016 SFS Cavalcade Best Paper in Corporate Finance Selection Committee. (March 2016).

Member 2016 EFA Program Committee. (February 2016 ‐ March 2016).

Member of the program committee 2016 WFA Program Committee. (December 2015 ‐ January 2016).

Member of the program committee 2015 Napa Conference on Financial Markets Program Committee. (November 2015 ‐ December

2015). Member of program committee

"Journal of Finance", Ad Hoc Reviewer, Papers. (October 2015). "Review of Financial Studies", Ad Hoc Reviewer, Papers. (October 2015). "Management Science", Ad Hoc Reviewer, Papers. (August 2015). 2015 WashU CFAR Program Committee. (July 2015 ‐ August 2015).

Member of program committee "Journal of Law, Finance and Accounting", Ad Hoc Reviewer, Papers. (June 2015). "The Financial Management Association International", Ad Hoc Reviewer, Papers. (November 2014 ‐

May 2015). Track Chair for the Annual Meeting in Orlando, FL

"Research Grants Council of Hong Kong". (April 2015).

Reviewer "Journal of Finance", Ad Hoc Reviewer, Papers. (March 2015). 2015 EFA Program Committee. (February 2015 ‐ March 2015).

Member of the program committee "Journal of Finance", Ad Hoc Reviewer, Papers. (February 2015). 2015 WFA Program Committee. (December 2014 ‐ January 2015).

Member of the program committee

Public/Community Other Media exposure V. SUPPLEMENTARY INFORMATION Consulting and Expert-Witness Activities


Academic, Corporate Governance Association of Turkey, Pro Bono. (February 2013 ‐ Present).

Member of Academic Advisory Council Academic, Organisation for Economic Co‐operation and Development, Paris, France, Compensated,

approximately 30 hours spent for the year. (November 2014 ‐ February 2015). External consultant to the Corporate Governance, Value Creation and Growth Programme of the OECD Corporate Governance Committee (November 2014 ‐ February 2015)

Directorships and Management Responsibilities Teaching Activities Outside USC Work by USC faculty at another college or university requires advance approval per the Faculty Handbook. In addition, instruction or course creation for other outside enterprises may be inconsistent with a faculty member’s responsibilities to USC. Before undertaking any such commitment, a faculty member must seek advance approval from the dean and take reasonable steps to ensure that the proposed activity will not create a conflict or appearance of conflict with any USC program, or dilute USC’s academic stature. Further, any faculty member may be an educator at another institution or enterprise in non-emergency situations only upon the written prior approval of the Provost or the Provost’s designate. List any teaching activities outside USC. Financial Interests List all entities having a relationship to the University in which you have a significant financial interest (ownership of 5% or more). Impact on Profession Other information Describe anything else you would like included in your annual performance review that is not collected elsewhere in this system that you feel should be taken into account in assessing your contributions for this year

Positions Held at USC Marshall

Associate Professor, Finance and Business Economics. (April 2010 ‐ Present).

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8. Recognize and understand the elements of optimal capital structure, the effects of financial leverage, bankruptcy, and the role of taxes.

9. Understand the dynamics of behavioral finance and its influence on individual and corporate financial decision‐making (e.g., the impact of heuristics).

10. Understand derivatives, or options, in the context of corporate finance.

These course level objectives align with selected Marshall Program Learning Goals. Please see table in Appendix for specifics. Required Materials

Fundamentals of Corporate Finance, Eleventh Edition by Ross, Westerfield and Jordan. The Tenth Alternative edition is also acceptable.

Calculator with financial functions. I will teach from the Texas Instruments BA II Plus. Other calculators are similar, such as the BA II Plus Professional, the Hewlett Packard 17bII+, and Hewlett Packard 10bII. Many graphical calculators, such as the TI‐83, have built‐in financial functions. However, it is the student’s responsibility to learn the functions of their particular calculators. You should bring your calculator to all classes and exams. You will be extremely disadvantaged if you do not have your calculator during exams. During exams you will not be allowed to use cellphone calculators, computers, or any other device that can communicate to other devices, so learning how to use the financial calculator is essential for success in the class.

Prerequisites: ACCT 410, BUAD 250a, BUAD 280 or BUAD 305.

Course Notes: Copies of lecture slides and other class information are available through your Blackboard account. Grading Summary:

Exams % of Grade Exam 1 Exam 2

25% 25%

Exam 3 25% Exam 4

25%

TOTAL 100%

Three items are considered when assigning final grades: 1. Your average weighted score as a percentage of the available points for all exams (the

points you receive divided by the number of points possible). 2. The overall average percentage score within the class. 3. Your ranking among all students in the class.

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Your grade will not be based on a mandated target, but on your performance. Historically, the average grade for this class is about a B. The percentage of students getting each grade in the past is approximately:

A+ 10% A 11% A‐ 12% B+ 13% B 14% B‐ 13% C+ 12%

C or lower The remainder

Assignments and Grading Detail Your grade is made up of your exam scores only:

1. Exams. All exams are closed book, closed notes. Financial calculators are allowed and recommended, but E‐devices (cell phones, PDAs, iPhones, Blackberries, other texting devices, laptops, iPods, etc.) are not allowed. You will be provided with any relevant equations (and some irrelevant ones). All exams will use the Scantron multiple choice format. Students must provide their own pencils. Students must take the exam in the lecture section in which they are registered. All four exams are 75 minute‐timed exams held during regular class meeting times and in the regular class location. Therefore, there are no conflicts of exam times with any other course at USC. Exam Absence Policy Students are required to be present for all four exams. If you are not able to take the exams on the dates and times specified in the detailed schedule, you should not take this class.

There will be no make‐up exams. However, there are legitimate reasons for missing an exam. If you provide documentation of serious medical problems or crime incidents for missing an exam, the other exam scores will be re‐weighted to accommodate the missing score. However, if you miss more than one exam, I will be unable to assign a complete grade to you.

2. Assignments. There will be 8 assignments posted to Blackboard during the course. They will not be graded. They are designed to provide practice material during the course. Answers to the homework will be posted online for students to evaluate their performance.

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Technology Policy Personal computers and wireless Internet are a key part of today’s technological culture, but they also can distract you from the class discussion and dampen participation. You may bring your laptops/iPads etc. to class for note‐taking, but please refrain from browsing the internet, updating your Facebook profile, playing games, instant messaging, shopping, etc. Although you may think you are being discreet, 90% of the time students engaging in such behavior give themselves away (through inappropriate facial expressions, lack of eye contact, out of sync typing, etc.). Use of computer in the classroom is a privilege. If you abuse this privilege, laptops may be banned from the classroom. Teaching Assistant The teaching assistant is listed at the top of the syllabus. The TA will hold regular office hours and can answers questions on the material during office hours or via email. Tutoring Tutoring is offered through the Marshall Office of Undergraduate Advising as a supplement to classroom instruction. Tutors are able to assist students in understanding difficult concepts, but tutoring sessions are only effective if students regularly attend class and actively engage in the process of thinking critically about the course content. For more information on tutoring, visit the Marshall Office of Undergraduate Advising in BRI‐104 (213‐740‐0690), or http://students.marshall.usc.edu/undergrad/advising/. MARSHALL GUIDELINES Add/Drop Process This class will remain open enrollment (R‐clearance) for the first three weeks of the semester. If there is an open seat, students will be freely able to add a class using Web Registration throughout the first three weeks of the term. If the class is full, students will need to continue checking Web Registration to see if a seat becomes available. There are no wait lists and the professor cannot add students. See USC guidelines here: http://www.usc.edu/dept/publications/cat2012/private/pdf/2012_2013/academic_policies_12.pdf

Waitlist. There are no centralized wait lists for Marshall undergraduate courses. Although there are no wait lists, the Undergraduate Advising Office provides a system by which students can indicate their interest in enrolling in classes that are currently full in order to track demand and manage classroom space effectively.

Dropping Students. The professor may drop any student who, without prior consent, does not attend the first two class sessions. The instructor is not required to notify the student that s/he is being dropped.

Statement for Students with Disabilities Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to me by Tuesday September 8. DSP is located in Grace Ford Salvatori Hall 120

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and is open 8:30 a.m.–5:00 p.m., Monday through Friday. The phone number for DSP is (213) 740‐0776. For more information visit www.usc.edu/disability. Statement on Academic Integrity USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, contains the Student Conduct Code in Section 11.00, while the recommended sanctions are located in Appendix A. http://www.usc.edu/dept/publications/SCAMPUS/gov/ Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: http://www.usc.edu/student‐affairs/SJACS/ Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal. Emergency Preparedness/Course Continuity In case of emergency, and travel to campus is difficult, USC executive leadership will announce an electronic way for instructors to teach students in their residence halls or homes using a combination of Blackboard, teleconferencing, and other technologies. Instructors should be prepared to assign students a "Plan B" project that can be completed at a distance. For additional information about maintaining your classes in an emergency please access: http://cst.usc.edu/services/emergencyprep.html Please activate your course in Blackboard with access to the course syllabus. Whether or not you use Blackboard regularly, these preparations will be crucial in an emergency. USC's Blackboard learning management system and support information is available at blackboard.usc.edu. Incomplete Grades An incomplete (IN) grade may be assigned due to an “emergency” that occurs after the 12th week of classes. An “emergency” is defined as a serious documented illness, or a documented unforeseen situation that is beyond the student’s control, that prevents a student from completing the semester. Prior to the 12th week, the student still has the option of dropping the class. Arrangements for completing an IN course should be initiated by the student, and negotiated with the instructor. Class work to complete the course should be completed within one calendar year from the date the IN was assigned. The IN mark will be converted to an F grade should the course not be completed.

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COURSE READINGS/CLASS SESSIONS

o Students should read the assigned chapter(s) BEFORE the associated lecture date.

Week Day Topic Chapters

AUG 25 Tue Introduction to Corporate Finance What does a financial manager do? Forms of Business Organization, Goal of Financial Mgmt, Agency Problem, Principal‐Agent Problem, Incentives

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AUG 27 Thu Financial Statements Balance Sheet, Income Statement, Average versus marginal tax rates, Operating Cash Flow, Change in Net Working Capital, Standardized Financial Statements, Sources and Uses of Cash, Ratio Analysis

2 & 3

SEP 1 Tue Time Value of Money Future Value and Compounding, investing for a single period, compound growth, lump sum versus payments, Present Value and discounting, present versus future value, determining the discount rate, single period present value, lump sum versus payments

5

SEP 3 Thu Discounted Cash Flow Valuation Future and Present Values of multiple cash flows, Valuation of Annuities, Perpetual Bonds, Future value of Annuities, Annuities Due

6

SEP 8 Tue Discounted Cash Flow Valuation Effective Annual Rates, Calculating and comparing rates, EAR versus APR, Continuous Compounding, Loan Types, Amortization, Pure Discount Loans, Interest Only loans, Amortized Loans

6

SEP 10 Thu Review for Exam 1

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SEP 15 Tue Interest Rates and Bond Valuation Bonds and valuation of bonds, Bond Features, Interest Rate Risk, Default and Credit Risk, Re‐investment rate risk, Bond Indenture, Debt or Equity? Long Term Debt, Government Bonds, Corporate Bonds, Mortgage Bonds, Floating Rate bonds, Zero Coupon Bonds

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SEP 17 Thu Exam 1

SEP 22 Tue Interest Rates and Bond Valuation Bond Ratings, Moody’s and Standard and Poors, Investment Grade versus High Yield (Junk) Debt, Real versus nominal rates, Fisher Effect, Term Structure of Interest Rates – Yield Curve

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SEP 24 Thu No Class

SEP 29 Tue Stock Valuation Zero Growth, Constant Growth Model, Shareholder Rights, Common Stock versus Preferred Stock, Cumulative versus non‐cumulative, Dealers and Brokers, NYSE, NASDAQ

8

OCT 1 Thu Net Present Value and Other Investment CriteriaNPV estimate, Payback Rule, Internal Rate of Return, Discounted Payback, Profitability Index, Capital Budgeting

9

OCT 6 Tue Net Present Value and Other Investment CriteriaIRR versus NPV, Mutually Exclusive Projects, Nonconventional cash flows, NPV profile, Acceptance and rejection rules for each capital budgeting criteria

9

OCT 8 Thu Review for Exam 2

OCT 13 Tue Exam 2

8

OCT 15 Thu Making Capital Investment Decisions Incremental Cash Flows, Pro Forma Statements, Side Effects, Sunk Costs, Opportunity Costs, Net Working Capital, Financing Costs

10

OCT 20 Tue Making Capital Investment Decisions Depreciation (MACRS) , Operating Cash Flow – alternative definitions, Setting a Bid Price, Cost Cutting Proposals

10

OCT 22 Thu Capital Market History Returns thru time for different asset classes, Historical record, Risk premiums, variability of returns, average versus geometric, capital market efficiency

12

OCT 27 Tue Return, Risk, and Security Market Line Expected Returns and variances, portfolio weights and expected returns, unexpected returns, Systematic and unsystematic risk, diversification

13

OCT 29 Thu Return, Risk, and Security Market Line Systematic risk and beta, Portfolio beta, Security Market Line, Reward to risk ratio, Beta and the risk premium, Capital Asset Pricing Model (CAPM), Cost of Capital

13

NOV 3 Tue Review for Exam 3

NOV 5 Thu Exam 3

NOV 10 Tue Cost of Capital Cost of Capital, Cost of Equity, Cost of Debt, Cost of Preferred Stock

14

NOV 12 Thu Cost of Capital Weighted Average Cost of Capital, Divisional Cost of Capital, Project Cost of Capital

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NOV 17 Tue Financial Leverage and Capital Structure Policy Capital Structure Question – Debt or Equity Financing? Effect of Financial leverage, Cost of equity or debt? M&M proposition I&II

16

NOV 19 Thu Financial Leverage and Capital Structure Policy M&M proposition I and II with and without corporate taxes, Bankruptcy Costs, Optimal Capital Structure, Bankruptcy liquidation versus reorganization

16

NOV 24 Tue Dividends and Payout Policy Cash dividends, stock dividends, Low payouts versus high payout ratios, tax and legal benefits, dividend policy, stock repurchase plans, stock splits, reverse splits

17

NOV 26 Thu Thanksgiving ‐ No Class

DEC 1 Tue Review for Exam 4

DEC 3 Thu Exam 4

All exams for this course are held during regular class time in the regular location. There are no exams during USC’s official Finals Week.

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APPENDIX Alignment of Course Learning Objectives with Marshall’s Six Undergraduate Program Learning Goals

Goal Marshall Program Learning Goal Description Covered in this

Course (Goals 1, 3, 5, and relevant selected sub-goals)

Emphasis/Relation to

Course Objectives

Relevant Course Topics

1 Our graduates will understand types of markets and key business areas and their interaction to effectively manage different types of enterprises. Specifically, students will: 1.1 Demonstrate foundational knowledge of core business disciplines, including business analytics and business economics. 1.2 Understand the interrelationships between functional areas of business so as to develop a general perspective on business management. 1.3 Apply theories, models, and frameworks to analyze relevant markets (e.g. product, capital, commodity, factor and labor markets). 1.4 Show the ability to utilize technologies (e.g., spreadsheets, databases, software) relevant to contemporary business practices.

High (Course learning

objectives 1-10)

Discussion of Net Present Value (NPV); Weighted Average Cost

of Capital (WACC), etc.

3 Our graduates will demonstrate critical thinking skills so as to become future-oriented decision makers, problem solvers and innovators. Specifically, students will: 3.1 Students will understand the concepts of critical thinking, entrepreneurial thinking and creative thinking as drivers of innovative ideas (not explicit for this course). 3.2 Critically analyze concepts, theories and processes by stating them in their own words, understanding key components, identifying assumptions, indicating how they are similar to and different from others and translating them to the real world. 3.3 Be effective at gathering, storing, and using qualitative and quantitative data and at using analytical tools and frameworks to understand and solve business problems. 3.4 Demonstrate the ability to anticipate, identify and solve business problems. They will be able to identify and assess central problems, identify and evaluate potential solutions, and translate a chosen solution to an implementation plan that considers future contingencies.

High (Course learning

objectives 1-10)

Discussion of ratio analysis; stock valuation; etc.

5 Our graduates will demonstrate ethical reasoning skills, understand social, civic, and professional responsibilities and aspire to add value to society. Specifically, students will: 5.1 Understand professional codes of conduct. 5.2 Recognize ethical challenges in business situations and assess appropriate courses of action.

Moderate (Course learning

objectives 1, 8, 9)

Discussion of conflicts of interest; principal/agent problems; corporate governance, etc.

Marshall Undergraduate Program Goals not Explicitly Covered by this Course (Goals 2, 4, 6)

(Continued next page)

2 Our graduates will develop a global business perspective. They will understand how local, regional, and international markets, and economic, social and cultural issues impact business decisions so as to anticipate new opportunities in any marketplace. Specifically, students will: 2.1 Understand how local, regional and global markets interact and are impacted by economic, social and cultural factors. 2.2 Understand that stakeholders, stakeholder interests, business environments (legal, regulatory, competitor) and business practices vary across regions of the world.

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4 Our graduates will develop people and leadership skills to promote their effectiveness as business managers and leaders. Specifically, students will: 4.1 Recognize, understand, and analyze the motivations and behaviors of stakeholders inside and outside organizations (e.g., teams, departments, consumers, investors, auditors). 4.2 Recognize, understand and analyze the roles, responsibilities and behaviors of effective managers and leaders in diverse business contexts e.g., marketing, finance, accounting. 4.3 Understand factors that contribute to effective teamwork.

6 Our graduates will be effective communicators to facilitate information flow in organizational, social, and intercultural contexts. Specifically, students will: 6.1 Identify and assess diverse personal and organizational communication goals and audience information needs. 6.2 Understand individual and group communications patterns and dynamics in organizations and other professional contexts. 6.3 Demonstrate an ability to gather and disseminate information and communicate it clearly, logically, and persuasively in professional contexts.

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GSBA 521B Term III, Fall 2015 Professor Ozbas

All Rights Reserved, 2

COURSE MATERIALS

Required:

Ross, Stephen, Randolph Westerfield, Jeffrey Jaffe, and Bradford Jordan, Corporate Finance: Core Principles & Applications, 4th Edition, McGraw-Hill Irwin, 2013. ISBN 978-0-07-786165-0 Debt Policy at UST Inc. Case (HBS Case #9-200-069)

Optional: The Wall Street Journal, Bloomberg Businessweek, Economist, Financial Times.

Calculator: If you do not already have a financial calculator, an HP 10BII, 12C, 17B or TI BA II Plus calculator is recommended. The HP17B will be used in class.

USC Blackboard Course Pages:

All information for this course, including announcements, assignments, solutions, and other resources, will be posted on the USC Blackboard Course Pages under “https://blackboard.usc.edu/”. If you have any questions or need assistance with the Blackboard Course Pages, please contact the Marshall Help Desk at (213) 740-3000 or [email protected].

EXPECTATIONS

1. Students are expected to complete all assigned readings prior to each class. There are many good problems at the end of each chapter in the text. I recommend several of them in each session. These problems will not be collected or graded but it is highly recommended that you do them. The solutions to these end-of-chapter problems are available on Blackboard.

2. Students are also expected to stay abreast of current issues in the economy and financial markets. In particular, I will frequently refer to data and articles in the Wall Street Journal.

3. Students are responsible for any work missed due to an absence from class. If you miss a class session, I encourage you to get notes and materials from your fellow group members. I recommend that you use a “Buddy System” and arrange for your group members to pick up extra handouts.

4. Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to me no later than the end of Week 1. DSP is located in Grace Ford Salvatori Hall 120 and is open from 8:30 am to 5:00 pm Monday through Friday. You may contact DSP at (213) 740-0776. For more information visit www.usc.edu/disability.

GRADING The final course grade will be assigned based on the combined score from your class participation, case, quizzes, and a final exam. The final course grade will include such factors as the class mean, standard deviation, and rank, as well as other considerations. I will not use a strict statistical rule (e.g., a rule based on one standard deviation) in assigning your final course grade. The target course GPA is 3.3. Grading will be based on:

Points Class Participation 5 Case (Team grade) 15 3 Quizzes (Best 2 of 3) 24 Final Exam 56

TOTAL 100



CLASS PARTICIPATION Class participation is strongly encouraged. The class participation grade will reflect my assessment of both the quantity and quality of a student’s individual contribution to the classroom learning environment. Be prepared for “cold-calling” in all class meetings. Note that regular attendance is necessary for class participation; however, it is not sufficient for a higher letter grade in this class. CASE—DEBT POLICY AT UST Your team (the 5-6 member team assigned by the Marshall MBA Program Office) will be collectively responsible for the Debt Policy at UST Inc. case assignment. The detailed assignment will be posted on Blackboard. The case is designed to provide you with the opportunity to apply your newly-acquired expertise in corporate financial policy and capital structure. Your team’s task is to recommend to the Board of UST whether the firm should proceed with the proposed $1 billion leveraged recapitalization plan. In doing so, you should 1) discuss what you have considered and why, 2) describe and quantify your analyses, including the pros and cons of undertaking the leveraged recapitalization, and 3) summarize your recommendation. The case will count for 15 points of your course grade. The due date is November 23, 2015.

Teams 1-6: your task is to recommend for a leveraged recapitalization with quantitative and qualitative support

Teams 7-13: your task is to recommend against a leveraged recapitalization with quantitative and qualitative support

Each member of the team is expected to make a contribution and be prepared to participate in the case discussion. In addition, your team will submit a hard copy case report of one-page single spaced executive summary describing your recommendation(s), followed by up to 5-page appendices of supporting calculations and analyses. The format of the written case report is as follows: Date: November 23, 2015 From: Team A1 (Bernanke, B., Draghi, M., Lagarde, C., Summers, L., and Yellen, J.) To: The Board of Directors of UST Inc. Cc: Oguzhan Ozbas Re: Leveraged Recapitalization UST Inc. is a leading company in ... Based on our analysis, we recommend that … A peer evaluation form will be used to assess individual member’s contributions to the case. The peer evaluation form will be posted on Blackboard and is to be completed and submitted in hard copy to me on November 23, 2015. Any team member who does not submit a hard copy of his/her evaluation of team members will be deemed to have given the maximum score to each member of the team. QUIZZES/EXAMS There will be three in-class quizzes. Each quiz will include four questions worth 3 points each. The final exam covers all course materials. The quizzes and final exam will be closed book, but you will be supplied with the appropriate mathematical formulae. I recommend that you use a financial calculator during the quizzes and the final exam. You may not store any course-related material on your calculator. No other electronic device is permitted during a quiz or exam.



You are required to take at least two out of the three quizzes and the final exam administered in this course. Quizzes and the final exam may not be made up. If you are unable to take a quiz or exam, you must obtain my written permission for missing the quiz or exam prior to the relevant date. Missed quizzes or exams are recorded as a zero.

USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, (www.usc.edu/scampus or http://scampus.usc.edu) contains the University Student Conduct Code (see University Governance, Section 11.00), while the recommended sanctions are located in Appendix A. Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: http://www.usc.edu/student-affairs/SJACS/. Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal. No audio or video recording is permitted. STATEMENT OF ACADEMIC CONDUCT AND SUPPORT SYSTEMS Academic Conduct Plagiarism – presenting someone else’s ideas as your own, either verbatim or recast in your own words – is a serious academic offense with serious consequences. Please familiarize yourself with the discussion of plagiarism in SCampus in Section 11, Behavior Violating University Standardshttps://scampus.usc.edu/1100-behavior-violating-university-standards-and-appropriate-sanctions/. Other forms of academic dishonesty are equally unacceptable. See additional information in SCampus and university policies on scientific misconduct, http://policy.usc.edu/scientific-misconduct/. Discrimination, sexual assault, and harassment are not tolerated by the university. You are encouraged to report any incidents to the Office of Equity and Diversity http://equity.usc.edu/ or to the Department of Public Safety http://capsnet.usc.edu/department/department-public-safety/online-forms/contact-us. This is important for the safety whole USC community. Another member of the university community – such as a friend, classmate, advisor, or faculty member – can help initiate the report, or can initiate the report on behalf of another person. The Center for Women and Men http://www.usc.edu/student-affairs/cwm/ provides 24/7 confidential support, and the sexual assault resource center webpage [email protected] describes reporting options and other resources. Support Systems A number of USC’s schools provide support for students who need help with scholarly writing. Check with your advisor or program staff to find out more. Students whose primary language is not English should check with the American Language Institute http://dornsife.usc.edu/ali, which sponsors courses and workshops specifically for international graduate students. The Office of Disability Services and Programs http://sait.usc.edu/academicsupport/centerprograms/dsp/home_index.htmlprovides certification for students with disabilities and helps arrange the relevant accommodations. If an officially declared emergency makes travel to campus infeasible, USC Emergency Information http://emergency.usc.edu/will provide safety and other updates, including ways in which instruction will be continued by means of blackboard, teleconferencing, and other technology.

ACADEMIC INTEGRITY



INSTRUCTOR Oguzhan Ozbas, Associate Professor of Finance and Business Economics & Co-Director of Doctoral Program in Finance Education B.S. Industrial Engineering, Boğaziçi University M.S. Industrial Administration, Carnegie Mellon University Ph.D. Financial Economics, Massachusetts Institute of Technology Professional Experience Treasury Associate, Ford Motor Company Consultant to the Organisation for Economic Co-operation and Development Corporate Governance Association of Turkey, Academic Council Research in Corporate Finance and Governance

“Evidence on the Dark Side of Internal Capital Markets,” with D. Scharfstein, Review of Financial Studies, 2010. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis,” with R. Duchin and B. Sensoy, Journal of Financial Economics, 2010.

“When Are Outside Directors Effective?,” with R. Duchin and J. Matsusaka, Journal of Financial Economics, 2010.

“Club Deals in Leveraged Buyouts,” with M. Officer and B. Sensoy, Journal of Financial Economics, 2010. “Integration, Organizational Processes, and Allocation of Resources,” Journal of Financial Economics, 2005. “Corporate Diversification and the Cost of Capital,” with R. Hann and M. Ogneva, Journal of Finance, 2013. “Executive Compensation and Deployment of Corporate Resources: Evidence from Working Capital,” with Nihat Aktas, Ettore Croci and Dimitris Petmezas, working paper, 2015. “Information Acquisition, Resource Allocation and Managerial Incentives,” with H. Rantakari, working paper, 2015.

“Managerial Accommodation, Proxy Access, and the Cost of Shareholder Empowerment,” with J. Matsusaka, working paper, 2015. “Opportunistic Proposals by Union Shareholders,” with J. Matsusaka and I. Yi, working paper, 2015.



COURSE OUTLINE AND ASSIGNMENTS

Session-Date (Day) Topic

Week 1 1-October 19, 2015 (M)

Overview of the Course Efficient Capital Markets and Behavioral Challenges Assignment:

Required Reading: Chapter 13 Efficient Capital Markets and Behavioral Challenges

Recommended text problems: 2, 3, 4 Key Questions:

What is the definition of capital market efficiency? o What conditions generally lead to market efficiency? o What are the three forms of market efficiency?

What are the implications of market efficiency for corporate finance?

What are the empirical challenges to market efficiency?

2-October 22, 2015 (TH)

Efficient Capital Markets and Behavioral Challenges (Cont’d) Short-Term Financing Assignment:

Required Reading: Chapter 18 Short-Term Finance and Planning Recommended text problems: 1, 4, 6, 11, 17

Key Questions:

What are the components of the cash cycle and what are some characteristics of a firm with a long cash cycle?

What should be considered in setting a firm’s short-term financial policy?



Session-Date (Day)

Topic

Week 2 3-October 26, 2015 (M)

Raising Capital from the Public Guest Speaker—Vinay V. Prabhu, Managing Director, Investment Banking Division, Morgan Stanley, on “IPOs and Other Forms of Capital Raising.” Assignment:

Required Reading: Chapter 19.2-19.12 Recommended text problems: 1,4, 6, 8, 14

Key Questions:

What are the basic methods of raising capital? What are the basic procedures in a new public security issue? What is a general cash offer (IPO and seasoned new issues)? Why

go public? What are the basic procedures in an IPO? o Negotiated offer and Dutch Auction

What are the costs of issuing securities? What is a rights offer, a shelf registration, and a private

placement?

4-October 28, 2015 (W)

Quiz 1 Long-Term Financing Assignment:

Required Reading: Chapters 5.2, 5.4-5.5 and 6.5-6.6 Recommended text problems: 5.18, 5.20, 5.21, Example 6.6

(p.179) for the case of 20,000 shares outstanding Key Questions:

What are the basic characteristics of common and preferred stock? o What is the difference between cumulative voting and

straight voting? o What are the rights of shareholders?

What are characteristics of corporate long-term debt? o What is an indenture, call provision, sinking fund? o What are some different types of bonds?



Session-Date (Day)

Topic

Week 3 5-November 2, 2015 (M)

Capital Structure: Basic Concepts Assignment:

Required Reading: Chapter 14 Capital Structure: Basic Concepts Recommended text problems: 1, 4, 14, 15, 24

Key Questions:

What is the effect of financial leverage on EPS and ROE? When does capital structure matter?

o Under what conditions will a firm’s value and WACC not change with the use of debt?

o Why does the cost of equity increase with the use of debt? What is the quirk in the tax code that makes a levered firm more

valuable than an otherwise identical unlevered firm?

6-November 4, 2015 (W) Guest Speaker—Kevin Farr, CFO, Mattel, Inc., on “Managing Global Finance” Key questions:

What are the guiding principles for the world’s largest toy maker in allocating its capital?

o What valuation methods does Mattel employ to make its investment decisions? And why?

o How does the firm make its investment decision for organic growth and acquisitions?

How does the firm finance its investments?


Capital Structure: Limits to the Use of Debt Assignment:

Required Reading: Chapter 15 Capital Structure: Limits to the Use of Debt


What are stockholders inclined to do when a firm is under financial distress?

What are the direct and indirect costs of bankruptcy? o Why and how do taxes and bankruptcy costs generate a

“target” capital structure? What is the pecking order theory? What do we know about empirical capital structure? What factors

do we consider in setting a target capital structure? Why do some firms use a lot of debt and others use very little?



Session-Date (Day)

Topic

8-November 11, 2015 (W)

Quiz 2 Dividends and Other Payouts Assignment:

Required Reading: Chapter 16 Dividends and Other Payouts Recommended text problems: 1, 3, 5, 6, 17

Key Questions:

What are the characteristics of regular cash dividends? o What is the procedure for cash dividend payment? o What is the stock price behavior around the ex-dividend

date? When does dividend policy matter?

o What are some factors that might motivate a firm to pay more (or less) dividends than implied by free cash flow?

o Why don’t some firms pay any dividends? What are some of the issues in considering share repurchases as an

alternative to cash dividend payouts? What is a sensible payout policy? Why do firms undergo stock splits and reverse stock splits?


Dividends and Other Payouts (Cont’d)

10-November 18, 2015 (W)

Options and Corporate Finance Assignment:

Required Reading: Chapter 17 Options and Corporate Finance Recommended text problems: 1, 2, 7, 8, 30

Key Questions:

Why are options widely used? o What is a call option? A covered call strategy? o What is a put option? A protected put strategy? o What are the payoffs and bounds of an option?

What are the factors that determine the price of an option? How do you price a call option with the Black-Scholes Model? How can stockholders view bonds as owning put options? Why do firms issue option-embedded securities?



Session-Date (Day)

Topic


Debt Policy at UST Inc. Case Report Due Assignment: Your team’s task is to recommend to the Board of UST whether the firm should proceed with the proposed $1 billion leveraged recapitalization plan. In doing so, you should 1) discuss what you have considered and why, 2) describe and quantify your analyses, including the pros and cons of undertaking the leveraged recapitalization, and 3) summarize your recommendation.

Teams 1-6: your task is to recommend for a leveraged recapitalization with quantitative and qualitative support

Teams 7-13: your task is to recommend against a leveraged recapitalization with quantitative and qualitative support

Submit a hard copy case report of one-page, single-spaced memo (the format can be found on Page 3), summarizing your team’s analyses and recommendation, followed by up to 5-page appendices of supporting calculations and analyses.


Quiz 3 Options and Corporate Finance (Cont’d)

13-December 2, 2015 (W) International Finance Assignment:

Required Reading: Chapter 20 International Corporate Finance Recommended text problems: 1, 5, 7, 9, 11, 14

Key Questions:

Why is international finance important? What are the fundamental relationships between international

financial variables? o Purchasing power parity o International fisher effect

How do exchange rates affect a multinational firm’s investment and financing decisions?

o What are the methods for international capital budgeting? o How do firms manage exchange rate risk?

Week 8 14-December 7, 2015 (M)

Final Review

15-December 9, 2015 (W) 8:00 – 10:50 AM

FINAL EXAM JKP 112—OnPrem & DataScience project groupings JKP 210—EY & Skyview project groupings JKP 212—Nestle & Newport project groupings

FBE 652. FINANCIAL ECONOMICS I Professors John G. Matsusaka & Oguzhan Ozbas

Fall 2015

SYLLABUS

Overview The two-course sequence FBE 652 and FBE 655 provides a rigorous introduction to modern corporate finance. This class (FBE 652) establishes foundational concepts, beginning with the neoclassical and tradeoff models, moving to agency problems and asymmetric information, and then security design and control rights. The remainder of this class – and the Spring semester class – focuses on a group of current topics including financial intermediation, internal capital markets, mergers, diversification, product market competition, and corporate governance, areas where recent research has significantly advanced our understanding and in some cases reversed what was previously believed. The goal of the course is to familiarize students with central ideas underpinning research in corporate finance, develop an ability to frame phenomena in terms of existing theory, and to bring students to the research frontier in select areas. By the end of the course, students will have a working knowledge of the main tools of corporate finance research, and be equipped to begin independent research. Course Methods Class meetings are organized around lectures that develop models and discuss empirical results. Some papers will be presented by students in order to help develop presentation skills and create a participatory environment. There is a weekly homework assignment that focuses on modeling. Working through models has several benefits: it develops a deeper understanding of the underlying theory, prepares the student for independent theoretical research, and provides a foundation for empirical research.

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Grades Grades will be assigned on the following basis:

Homework 20% Midterm (October 13) 30% Final exam (December 10, 2 pm – 4 pm) 40% In-class presentations and participation 10%

At times this class will follow a standard lecture format, but we will also approach learning in a variety of other ways. Your responsibilities are:

1. Attend class, learn the lecture material. 2. Read the assigned papers. 3. In-class presentations. 4. Complete homework assignments. 5. Attend the Finance Seminar when the paper is in the area of corporate

finance, and be prepared to discuss the paper the following class. Teaching Assistant The teaching assistant is Conson Zhang: [email protected]. Conson is a doctoral student in finance who is working on his dissertation. He will be grading homework and going over the solutions each week at a time to be arranged. Contact Information Don’t hesitate to contact the instructors if you have questions about the class. Email is convenient: [email protected] or [email protected] or drop by our offices if we are there. Class Notes Policy Notes or recordings made by students based on a university class or lecture may only be made for purposes of individual or group study, or for other usual non-commercial purposes that reasonably arise from the student’s membership in the class or attendance at the university. This restriction also applies to any information distributed, disseminated or in any way displayed for use in relationship to the class, whether obtained in class, via email or otherwise on the Internet, or via any other medium. Actions in violation of this policy constitute a violation of the Student Conduct Code, and may subject an individual or entity to university discipline and/or legal proceedings.

mailto:[email protected]



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Students with Disabilities Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to one of the instructors as early in the semester as possible. DSP is located in Grace Ford Salvatori Hall 120 and is open 8:30 a.m.-5:00 p.m., Monday through Friday. The phone number for DSP is (213) 740-0776. Statement on Academic Integrity USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, contains the Student Conduct Code in Section 11.00, while the recommended sanctions are located in Appendix A. Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty.

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READINGS FOR FOUNDATIONAL CONCEPTS The following list is provisional and may be modified as the semester progresses. Required readings will be identified as we go. Asterisks indicate readings that will be discussed in class. PART I. Capital Structure: Debt versus Equity 1. Neoclassical Model and Tradeoff Model

*E. F. Fama & M. H. Miller, The Theory of Finance, Dryden Press, 1972, Chapters 1, 2, 4. [Neoclassical model. Book is out of print but can be downloaded at http://faculty.chicagobooth.edu/eugene.fama/research/.]

R. G. Rajan and L. Zingales, “What Do We Know About Capital Structure? Some Evidence from International Data,” Journal of Finance, December 1995. [Stylized facts.] F. Modigliani and M. H. Miller, “The Cost of Capital, Corporation Finance, and the Theory of Investment,” American Economic Review, June 1958. [The classic article.] F. Modigliani and M. H. Miller, “Reply to Heins and Sprenkle,” American Economic Review, September 1969. [Simpler proof using the risk-class method.] M. H. Miller, “Debt and Taxes,” Journal of Finance, May 1977. [Fundamental article.]

*G. Andrade & S. N. Kaplan, “How Costly is Financial (not Economic) Distress?,” Journal of Finance, October 1998. *J. R. Graham, “How Big Are the Tax Benefits of Debt?,” Journal of Finance, 2000. H. Almeida & T. Philippon, “The Risk-Adjusted Cost of Financial Distress,” Journal of Finance, December 2007. [Risk-adjusted estimates.] J. Blouin, J.E. Core, and W. Guay, “Have the Tax Benefits of Debt Been Overestimated?,” Journal of Financial Economics, 2010. [Improved simulations; earnings mean reverting.] J.H. van Binsbergen, J.R. Graham, and J. Yang, “The Cost of Debt,” Journal of Finance, 2010 . [Using 1986 TRA to trace out marginal cost functions.] R. Elkamhi, J. Ericcson, and C.A. Parsons, “The Cost and Timing of Financial Distress,” Journal of Financial Economics, 2012. [Broader conception of bankruptcy cost.] V. Maksimovic and J. Zechner, “Debt, Agency Costs, and Industry Equilibrium,” Journal of Finance, 1990. [Industry equilibrium model.] Korteweg, Arthur, “The Net Benefits to Leverage,” Journal of Finance, 2010.

http://faculty.chicagobooth.edu/eugene.fama/research/

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2. Security Choice: Agency Problems & Asymmetric Information

*M. C. Jensen and W. H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” JFE, 1976. [Asset substitution.] *S. C. Myers, “Determinants of Corporate Borrowing,” Journal of Financial Economics, 1977. [Debt overhang/underinvestment.] D. W. Diamond, “Reputation Acquisition in Debt Markets,” Journal of Political Economy, August 1989. [Reputation as a solution.] *S. C. Myers and N. S. Majluf, “Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have,” Journal of Financial Economics, 1985. [Asymmetric information/adverse selection.] S. A. Ross, “The Determinants of Financial Structure: The Incentive Signalling Approach,” Bell Journal of Economics, 1977. [Signaling.] *M. C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers,” American Economic Review, May 1986. [Free cash flow problem.] *R. Stulz, “Managerial Discretion and Optimal Financing Policies,” Journal of Financial Economics, 1990. [Attempt to formalize FCF idea.] Zwiebel, Jeffrey, “Dynamic Capital Structure under Managerial Entrenchment,” American Economic Review, 1996. [Endogenous debt in free cash flow environment.]

3. Evidence *I. Shyam-Sunder and S. C. Myers, “Testing Static Tradeoff Against Pecking Order Models of Capital Structure,” Journal of Financial Economics, 1999. [Tradeoff versus pecking order theory.] *E. F. Fama & K. R. French, “Financing Decisions: Who Issues Stock?,” Journal of Financial Economics, June 2005. [Evidence against the “pecking order” theory.] M. T. Leary & M. R. Roberts, “Do Firms Rebalance Their Capital Structures?,” Journal of Finance, 2005. [Evidence for tradeoff model with adjustment costs.] J. Graham & C. Harvey, “The Theory and Practice of Corporate Finance: Evidence from the Field,” Journal of Financial Economics, 2001. [What managers say they do.] I. Welch, “Capital Structure and Stock Returns,” Journal of Political Economy, 2004. [Capital structure changes driven by stock price changes.] I. Strebulaev, “Do Tests of Capital Structure Theory Mean What They Say?,” Journal of Finance, 2007.

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I. Strebulaev & B. Yang, “The Mystery of Zero-Leverage Firms,” Journal of Financial Economics, 2013.

PART II. Security Design/Financial Contracting

4. Assigning Cash Flow

R. Townsend, “Costly State Verification,” J Economic Theory, 1979. [First CSV paper.] *D. Gale and M. Hellwig, “Incentive-Compatible Debt Contracts: The One-Period Problem,” Review of Economic Studies, 1985. [Easier to understand than Townsend.] P. DeMarzo and Y. Sannikov, “A Continuous-Time Agency Model of Optimal Contracting and Capital Structure,” Journal of Finance, 2006. [Dynamic security design.] P. DeMarzo and M. Fishman, “Optimal Long-Term Financial Contracting,” RFS, 2007.

5. Assigning Control Rights

S. J. Grossman and O. Hart, “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,” Journal of Political Economy, 1986. [First paper using ‘residual rights of control’.] O. Hart and J. Moore, “Property Rights and the Nature of the Firm,” Journal of Political Economy, 1990. [The other foundational paper.] *P. Aghion and P. Bolton, “An ‘Incomplete Contracts’ Approach to Financial Contracting,” Review of Economic Studies, July 1992. [Application of control rights to security choice.] O. Hart and J. Moore, “A Theory of Debt Based on the Inalienability of Human Capital,” Quarterly Journal of Economics, 1994, 841-879. M. Dewatripont and J. Tirole, “A Theory of Debt and Equity: Diversity of Securities and Manager-Shareholder Congruence,” Quarterly Journal of Economics, 1994.

Part IV. Topics 6. Financial Intermediation 7. Causal Inference 8. Investment-Cash Flow Sensitivity 9. Internal Capital Markets 10. Diversification 11. Business Groups 12. Takeovers 13. Governance and Control

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Instructor Profile John G. Matsusaka Education B.A. Economics, University of Washington M.A., Ph.D. Economics, University of Chicago Professional Charles F. Sexton Chair in American Enterprise, 2009- Professor of Finance and Business Economics, USC Marshall School, 1991- Professor of Business and Law, USC Law School, 2004- Professor of Political Science, USC, 2005- President, Initiative & Referendum Institute at USC, 2004- Vice Dean for Faculty and Academic Affairs, USC Marshall School, 2007-2013 John M. Olin Visiting Professor of Economics, GSB, University of Chicago, 2001 Visiting Associate in Economics, California Institute of Technology, 2000 Visiting Scholar, Anderson School, UCLA, 1996 National Fellow, Hoover Institution, Stanford University, 1994-1995 Other Professional Consultant on corporate governance, Council of Economic Advisors, Executive Office of the President, Washington D.C., 2002 Research in Finance and Governance

“Managerial Accommodation, Proxy Access, and the Cost of Shareholder Proposals,” with O. Ozbas, working paper, 2015.

“The Effect of Forced Refocusing on the Value of Business Groups,” with Y. Wang, working paper, 2015.

“When Are Outside Directors Effective?,” with R. Duchin and O. Ozbas, Journal of Financial Economics, 2010. “50+ Years of Diversification Announcements,” with M. Akbulut, Financial Review, 2010. “From Families to Formal Contracts: An Approach to Development,” with K. Kumar, Journal of Development Economics, 2009. “Decision Processes, Agency Problems, and Incomplete Information: An Economic Analysis of Capital Budgeting,” with A. M. Marino, Review of Financial Studies, 2005. “Internal Capital Markets and Corporate Refocusing,” with V. Nanda, Journal of Financial Intermediation, 2002. “Corporate Diversification, Value Maximization, and Organizational Capabilities,” Journal of Business, 2001 [Merton Miller Prize for “most significant paper.”]

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Instructor Profile Oguzhan Ozbas Education B.S. Industrial Engineering, Boğaziçi University M.S. Industrial Administration, Carnegie Mellon University Ph.D. Financial Economics, Massachusetts Institute of Technology Professional Associate Professor of Finance and Business Economics, USC Marshall, 2002- Visiting Associate Professor of Finance, Koç University, 2011-2012, 2013-2015 Treasury Associate, Ford Motor Company, Dearborn, MI, 1995-1998 Research in Corporate Finance and Governance

“Information Acquisition, Resource Allocation and Managerial Incentives,” with H. Rantakari, working paper, 2015.

“Managerial Accommodation, Proxy Access, and the Cost of Shareholder Proposals,” with J. Matsusaka, working paper, 2015. “Corporate Diversification and the Cost of Capital,” with R. Hann and M. Ogneva, Journal of Finance, 2013.

“Club Deals in Leveraged Buyouts,” with M. Officer and B. Sensoy, Journal of Financial Economics, 2010. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis,” with R. Duchin and B. Sensoy, Journal of Financial Economics, 2010. “Evidence on the Dark Side of Internal Capital Markets,” with D. Scharfstein, Review of Financial Studies, 2010. “When Are Outside Directors Effective?,” with R. Duchin and J. Matsusaka, Journal of Financial Economics, 2010. “Integration, Organizational Processes, and Allocation of Resources,” Journal of Financial Economics, 2005.

GSBA 521B - CORPORATE FINANCE: Financial Policies and Applications Term III 2016-2017

Instructor: Oguzhan Ozbas Office: HOH 714 Office Hours: Mondays and Wednesdays, 2 - 3:30 p.m. or by appointment Phone: (213) 740-0781 Email: [email protected] Course Assistants [email protected]

[email protected] [email protected]

COURSE OBJECTIVES

This course is a rigorous introduction to the modern theory and practice of corporate finance. The course objective is for you to learn the tools, frameworks and concepts that are needed to develop and implement sound corporate financial policies. Through applications to real business decisions, an important emphasis of the course is on linking corporate financial strategy to other aspects of corporate strategy. The design of financial policies can be viewed and understood through a simple principle; good financial policies add to firm value whereas bad ones destroy firm value. This simple principle is useful for understanding key concepts, including:

capital market efficiency short-term financing long-term financing capital raising financial leverage dividends, share buybacks

By the end of the course, you should be able to:

articulate the difference between efficient and inefficient capital markets evaluate the costs and benefits of alternative short-term and long-term financing options explain the mechanics of raising capital in the public markets assess and communicate the effect of various alternative capital structures on firm value state the benefits and costs of alternative payout policies

COURSE MATERIALS

Required:

Ross, Stephen, Randolph Westerfield, Jeffrey Jaffe, and Bradford Jordan, Corporate Finance: Core Principles & Applications, 4th Edition, McGraw-Hill Irwin, 2013. ISBN 978-0-07-786165-0 Course reader containing business cases

Optional: Wall Street Journal, Bloomberg Businessweek, Economist, Financial Times


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USC Blackboard Course Pages:

All information for this course, including announcements, assignments, solutions, and other resources, will be posted on the USC Blackboard Course Pages under “https://blackboard.usc.edu/”. If you have any questions or need assistance with the Blackboard Course Pages, please contact the Marshall Help Desk at (213) 740-3000 or [email protected].

EXPECTATIONS Each session will involve class discussion. In some instances, discussion will be centered on lectures; in others, it will be centered on a business case. Your participation is critical to the success of the course. You are expected to study all cases and readings, come to class, and participate in class discussion. You are also expected to work on end-of-chapter problems in the textbook. The course outline includes a list of recommended problems. Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to me no later than the end of Week 1. DSP is located in Grace Ford Salvatori Hall 120 and is open from 8:30 am to 5:00 pm Monday through Friday. You may contact DSP at (213) 740-0776. For more information, visit www.usc.edu/disability.

GRADING The final course grade will be assigned based on the combined score from your class participation, cases, quizzes, and a final exam. The final course grade will include such factors as the class mean, standard deviation, and rank, as well as other considerations. The target course GPA is 3.3. Grading will be based on:

CLASS PARTICIPATION The class participation grade will reflect both the quantity and quality of a student’s individual contribution to the classroom learning environment. Be prepared for “cold-calling” in all class meetings. Note that regular attendance is necessary for class participation; however, it is not sufficient for a higher letter grade in this class. CASE ASSIGNMENTS Your team (the 4-6-member team assigned by the Marshall MBA Program Office) will be collectively responsible for completing two case assignments (see the course outline, “A New Financial Policy at Swedish Match” due on November 9, 2016 and “Molycorp: Financing the Production of Rare Earth Minerals” due on December 5, 2016). The case assignments will provide you with the opportunity to apply your newly-acquired expertise in corporate financial policy and capital structure. They will count for 20 points of your course grade. The detailed assignments will be posted on Blackboard.

Points Class Participation 5 2 Case Assignments (Team) 20 3 Quizzes (Best 2 of 3) 20 Final Exam 55

TOTAL 100


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Each team member is expected to make a contribution and be prepared to participate in class discussion. In addition, for each case assignment, your team will submit a hard-copy one-page single-spaced executive summary describing your recommendation(s), followed by up to 5-page appendices of supporting calculations and analyses. The format should be as follows: Date: November 9, 2016 / December 5, 2016 From: Team X (Bernanke, B., Draghi, M., Lagarde, C., Summers, L., and Yellen, J.) To: The Board of Directors of Y Inc. Cc: Oguzhan Ozbas Re: Matter Z Y Inc. is a leading company in ... Based on our analysis, we recommend that … A peer evaluation form will be used to assess individual member’s contributions. The peer evaluation form will be posted on Blackboard and is to be completed and submitted in class on December 5, 2016. Any team member who does not submit a hard copy of his/her evaluation of team members will be deemed to have given the maximum score to each member of the team. There are three other case studies in the course reader for class discussion. QUIZZES/EXAMS There will be three in-class quizzes. Each quiz will include four questions worth 2.5 points each. The quizzes and final exam will be closed book, but you will be supplied with the appropriate mathematical formulae. No electronic device other than a calculator is permitted during a quiz or exam. You may not store any course-related material on your calculator. You are required to take at least two out of the three quizzes and the final exam administered in this course. Neither the quizzes nor the final exam may be made up; any missed quiz or exam will be recorded as a zero.

USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, (www.usc.edu/scampus or http://scampus.usc.edu) contains the University Student Conduct Code (see University Governance, Section 11.00), while the recommended sanctions are located in Appendix A. Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: http://www.usc.edu/student-affairs/SJACS/. Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal. No audio or video recording is permitted. All electronic devices, including laptops, tablets and cell phones, must be turned off during class meetings.

ACADEMIC INTEGRITY


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STATEMENT OF ACADEMIC CONDUCT AND SUPPORT SYSTEMS Academic Conduct Plagiarism – presenting someone else’s ideas as your own, either verbatim or recast in your own words – is a serious academic offense with serious consequences. Please familiarize yourself with the discussion of plagiarism in SCampus in Section 11, Behavior Violating University Standardshttps://scampus.usc.edu/1100-behavior-violating-university-standards-and-appropriate-sanctions/. Other forms of academic dishonesty are equally unacceptable. See additional information in SCampus and university policies on scientific misconduct, http://policy.usc.edu/scientific-misconduct/. Discrimination, sexual assault, and harassment are not tolerated by the university. You are encouraged to report any incidents to the Office of Equity and Diversity http://equity.usc.edu/ or to the Department of Public Safety http://capsnet.usc.edu/department/department-public-safety/online-forms/contact-us. This is important for the safety whole USC community. Another member of the university community – such as a friend, classmate, advisor, or faculty member – can help initiate the report, or can initiate the report on behalf of another person. The Center for Women and Men http://www.usc.edu/student-affairs/cwm/ provides 24/7 confidential support, and the sexual assault resource center webpage [email protected] describes reporting options and other resources. Support Systems A number of USC’s schools provide support for students who need help with scholarly writing. Check with your advisor or program staff to find out more. Students whose primary language is not English should check with the American Language Institute http://dornsife.usc.edu/ali, which sponsors courses and workshops specifically for international graduate students. The Office of Disability Services and Programs http://sait.usc.edu/academicsupport/centerprograms/dsp/home_index.htmlprovides certification for students with disabilities and helps arrange the relevant accommodations. If an officially declared emergency makes travel to campus infeasible, USC Emergency Information http://emergency.usc.edu/will provide safety and other updates, including ways in which instruction will be continued by means of blackboard, teleconferencing, and other technology.


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INSTRUCTOR Oguzhan Ozbas, Associate Professor of Finance and Business Economics & Co-Director of Doctoral Program in Finance Education B.S. Industrial Engineering, Boğaziçi University M.S. Industrial Administration, Carnegie Mellon University Ph.D. Financial Economics, Massachusetts Institute of Technology Professional Experience Treasury Associate, Ford Motor Company Consultant to the Organisation for Economic Co-operation and Development Research in Corporate Finance and Governance

“Evidence on the Dark Side of Internal Capital Markets,” with D. Scharfstein, Review of Financial Studies, 2010. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis,” with R. Duchin and B. Sensoy, Journal of Financial Economics, 2010.

“When Are Outside Directors Effective?,” with R. Duchin and J. Matsusaka, Journal of Financial Economics, 2010.

“Club Deals in Leveraged Buyouts,” with M. Officer and B. Sensoy, Journal of Financial Economics, 2010. “Integration, Organizational Processes, and Allocation of Resources,” Journal of Financial Economics, 2005. “Corporate Diversification and the Cost of Capital,” with R. Hann and M. Ogneva, Journal of Finance, 2013. “Executive Compensation and Deployment of Corporate Resources: Evidence from Working Capital,” with Nihat Aktas, Ettore Croci and Dimitris Petmezas, working paper, 2015. “Information Acquisition, Resource Allocation and Managerial Incentives,” with H. Rantakari, working paper, 2015.

“A Theory of Shareholder Approval and Proposal Rights,” with J. Matsusaka, working paper, 2016. “Opportunistic Proposals by Union Shareholders,” with J. Matsusaka and I. Yi, working paper, 2016.


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COURSE OUTLINE AND ASSIGNMENTS

Session-Date (Day) Topic

1-October 17, 2016 (M) Overview of the Course Efficient Capital Markets and Behavioral Challenges Assignment:

Required Reading: Chapter 13 Efficient Capital Markets and Behavioral Challenges


What is the definition of capital market efficiency? o What conditions generally lead to market efficiency? o What are the three forms of market efficiency?

What are the implications of market efficiency for corporate finance?

What are the empirical challenges to market efficiency?

2-October 19, 2016 (W) Efficient Capital Markets and Behavioral Challenges (Cont’d) Short-Term Financing Assignment:

Required Reading: Chapter 18 Short-Term Finance and Planning Recommended text problems: 1, 4, 6, 11, 17

Key Questions:

What are the components of the cash cycle and what are some characteristics of a firm with a long cash cycle?

What should be considered in setting a firm’s short-term financial policy?


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Session-Date (Day)

Topic

3-October 24, 2016 (M)

Quiz 1 Long-Term Financing Assignment:

Required Reading: Chapters 5.2, 5.4-5.5 and 6.5-6.6 Recommended text problems: 5.18, 5.20, 5.21, Example 6.6

(p.179) for the case of 20,000 shares outstanding Key Questions:

What are the basic characteristics of common and preferred stock? o What is the difference between cumulative voting and

straight voting? o What are the rights of shareholders?

What are characteristics of corporate long-term debt? o What is an indenture, call provision, sinking fund? o What are some different types of bonds?

4-October 31, 2016 (M) Tombstones (Case Discussion) The case contains brief descriptions and summary terms – “tombstones” – for six securities issued by U.S. firms during 2009-2010. Learning objective: take a tour of the securities “zoo.”

5-November 2, 2016 (W) Raising Capital from the Public Guest Speaker—Vinay V. Prabhu, Managing Director, Investment Banking Division, Morgan Stanley, on “IPOs and Other Forms of Capital Raising.” Assignment:

Required Reading: Chapter 19.2-19.12 Recommended text problems: 1,4, 6, 8, 14

Key Questions:

What are the basic methods of raising capital? What are the basic procedures in a new public security issue? What is a general cash offer (IPO and seasoned new issues)? Why

go public? What are the basic procedures in an IPO? o Negotiated offer and Dutch Auction

What are the costs of issuing securities? What is a rights offer, a shelf registration, and a private

placement?


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Session-Date (Day)

Topic

6-November 7, 2016 (M) Quiz 2 Capital Structure: Basic Concepts Assignment:

Required Reading: Chapter 14 Capital Structure: Basic Concepts Recommended text problems: 1, 4, 14, 15, 24

Key Questions:

What is the effect of financial leverage on EPS and ROE? When does capital structure matter?

o Under what conditions will a firm’s value and WACC not change with the use of debt?

o Why does the cost of equity increase with the use of debt? What is the quirk in the tax code that makes a levered firm more

valuable than an otherwise identical unlevered firm?

7-November 9, 2016 (W) A New Financial Policy at Swedish Match, Case Assignment Due Swedish Match is a profitable smokeless tobacco company with low debt compared to other firms in its industry. The firm’s CFO wants to revise the firm’s conservative financial policy. Learning objective: quantify the value of debt tax shields.

8-November 14, 2016 (M) Capital Structure: Limits to the Use of Debt Assignment:

Required Reading: Chapter 15 Capital Structure: Limits to the Use of Debt


What are stockholders inclined to do when a firm is under financial distress?

What are the direct and indirect costs of bankruptcy? o Why and how do taxes and bankruptcy costs generate a

“target” capital structure? What is the pecking order theory? What do we know about empirical capital structure? What factors

do we consider in setting a target capital structure? Why do some firms use a lot of debt and others use very little?


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Session-Date (Day)

Topic

9-November 16, 2016 (W) Restructuring JAL (Case Discussion) JAL has become highly levered and is quickly running out of liquidity following a series of extreme events. The company’s financial condition has started to have a negative effect on operations, further eroding profitability. Learning objective: understand the difference between costs of financial distress and costs of economic distress, and the economic rationales behind bankruptcy laws.

10-November 21, 2016 (M)

Quiz 3 Dividends and Other Payouts Assignment:

Required Reading: Chapter 16 Dividends and Other Payouts Recommended text problems: 1, 3, 5, 6, 17

Key Questions:

What are the characteristics of regular cash dividends? o What is the procedure for cash dividend payment? o What is the stock price behavior around the ex-dividend

date? When does dividend policy matter?

o What are some factors that might motivate a firm to pay more (or less) dividends than implied by free cash flow?

o Why don’t some firms pay any dividends? What are some of the issues in considering share repurchases as an

alternative to cash dividend payouts? What is a sensible payout policy? Why do firms undergo stock splits and reverse stock splits?

11-November 28, 2016 (M)

Apple, Einhorn, and iPrefs (Case Discussion) Apple Inc. has a very large cash balance and is under pressure to return cash to shareholders. Hedge fund manager David Einhorn thinks Apple can “unlock value” by issuing perpetual preferred stock, dubbed iPrefs. Learning objective: discuss real and financial frictions that make payout policy and liquidity management relevant for firm value.


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Session-Date (Day)

Topic

12-November 30, 2016 (W)

Options and Corporate Finance Assignment:

Required Reading: Chapter 17 Options and Corporate Finance Recommended text problems: 1, 2, 7, 8, 30

Key Questions:

Why are options widely used? o What is a call option? A covered call strategy? o What is a put option? A protected put strategy? o What are the payoffs and bounds of an option?

What are the factors that determine the price of an option? How do you price a call option with the Black-Scholes Model? How can stockholders view bonds as owning put options? Why do firms issue option-embedded securities?

13-December 5, 2016 (M) Molycorp: Financing the Production of Rare Earth Minerals, Case

Assignment Due With plummeting prices for rare earth minerals in the middle of a major capital expenditure project, Molycorp’s management team is faced with a serious funding shortfall. Management has to decide: how much capital to raise, what kind to raise, and when to raise it. Learning objective: design a financing strategy that enables the firm to implement its business strategy while not exposing it to excessive financial risk.

14-December 7, 2016 (W)

Final Review

December 12, 2016 (M) 8:00 – 10:50 AM

FINAL EXAM Core A — JKP 112 Core B — JKP 210 Core C — JKP 212

FBE 652. FINANCIAL ECONOMICS I Professors John G. Matsusaka & Oguzhan Ozbas

Fall 2016

SYLLABUS

Overview The two-course sequence FBE 652 and FBE 655 provides a rigorous introduction to modern corporate finance. This class (FBE 652) establishes foundational concepts, beginning with the neoclassical and tradeoff models, moving to agency problems and asymmetric information, then security design and control rights, and financial intermediation. The remainder of this class – and the Spring semester class – focuses on current topics including causal inference, internal capital markets, mergers, diversification, business groups, product market competition, and corporate governance, areas where recent research has significantly advanced our understanding and in some cases reversed what was previously believed. The goal of the course is to familiarize students with central ideas underpinning research in corporate finance, develop an ability to frame phenomena in terms of existing theory, and to bring students to the research frontier in select areas. By the end of the course, students will have a working knowledge of the main tools of corporate finance research, and be equipped to begin independent research. Course Methods Class meetings are organized around lectures that develop models and discuss empirical results. Some papers will be presented by students in order to help develop presentation skills and create a participatory environment. There is a weekly homework assignment that focuses on modeling. Working through models has several benefits: it develops a deeper understanding of the underlying theory, prepares the student for independent theoretical research, and provides a foundation for empirical research.

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Grades Grades will be assigned on the following basis:

Homework 20% Midterm (October 11) 30% Final exam (December 13, 11 am – 1 pm) 40% In-class presentations and participation 10%

At times this class will follow a standard lecture format, but we will also approach learning in a variety of other ways. Your responsibilities are:

1. Attend class, learn the lecture material. 2. Read the assigned papers. 3. In-class presentations. 4. Complete homework assignments. 5. Attend the Finance Seminar when the paper is in the area of corporate

finance, and be prepared to discuss the paper the following class. Teaching Assistant The teaching assistant is Yuan (Bruce) Li: [email protected]. Bruce is a doctoral student in finance who is working on his dissertation. He will be grading homework and going over the solutions each week at a time to be arranged. Contact Information Don’t hesitate to contact the instructors if you have questions about the class. Email is convenient: [email protected] or [email protected] or drop by our offices if we are there. Class Notes Policy Notes or recordings made by students based on a university class or lecture may only be made for purposes of individual or group study, or for other usual non-commercial purposes that reasonably arise from the student’s membership in the class or attendance at the university. This restriction also applies to any information distributed, disseminated or in any way displayed for use in relationship to the class, whether obtained in class, via email or otherwise on the Internet, or via any other medium. Actions in violation of this policy constitute a violation of the Student Conduct Code, and may subject an individual or entity to university discipline and/or legal proceedings.




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Students with Disabilities Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to one of the instructors as early in the semester as possible. DSP is located in Grace Ford Salvatori Hall 120 and is open 8:30 a.m.-5:00 p.m., Monday through Friday. The phone number for DSP is (213) 740-0776. Statement on Academic Integrity USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, contains the Student Conduct Code in Section 11.00, while the recommended sanctions are located in Appendix A. Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty.

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READINGS FOR FOUNDATIONAL CONCEPTS The following list includes more articles that you can read and digest in a semester. We will not discuss all of these readings in class. We will indicate before each class meeting those that we will discuss or that are otherwise essential for you to read. The remaining readings are supplied in case you want to take a “deep dive” into one of the topics. We have tried to list what might be considered essential reading in each area for those planning to produce new research on the topic. PART I. Capital Structure: Debt versus Equity 1. Neoclassical Model and Tradeoff Model

E. F. Fama and M. H. Miller, The Theory of Finance, Dryden Press, 1972, Chapters 1, 2, 4. [Neoclassical model. Book is out of print but can be downloaded at http://faculty.chicagobooth.edu/eugene.fama/research/.] R. G. Rajan and L. Zingales, “What Do We Know About Capital Structure? Some Evidence from International Data,” Journal of Finance, December 1995. [Stylized facts.] F. Modigliani and M. H. Miller, “The Cost of Capital, Corporation Finance, and the Theory of Investment,” American Economic Review, June 1958. [The classic article.] F. Modigliani and M. H. Miller, “Reply to Heins and Sprenkle,” American Economic Review, September 1969. [Simpler proof using the risk-class method.] M. H. Miller, “Debt and Taxes,” Journal of Finance, May 1977. [Fundamental article.]

G. Andrade & S. N. Kaplan, “How Costly is Financial (not Economic) Distress?,” Journal of Finance, October 1998. J. R. Graham, “How Big Are the Tax Benefits of Debt?,” Journal of Finance, 2000. H. Almeida & T. Philippon, “The Risk-Adjusted Cost of Financial Distress,” Journal of Finance, December 2007. [Risk-adjusted estimates.] J. Blouin, J.E. Core, and W. Guay, “Have the Tax Benefits of Debt Been Overestimated?,” Journal of Financial Economics, 2010. [Improved simulations; earnings mean reverting.] J.H. van Binsbergen, J.R. Graham, and J. Yang, “The Cost of Debt,” Journal of Finance, 2010 . [Using 1986 TRA to trace out marginal cost functions.] R. Elkamhi, J. Ericcson, and C.A. Parsons, “The Cost and Timing of Financial Distress,” Journal of Financial Economics, 2012. [Broader conception of bankruptcy cost.]

http://faculty.chicagobooth.edu/eugene.fama/research/

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V. Maksimovic and J. Zechner, “Debt, Agency Costs, and Industry Equilibrium,” Journal of Finance, 1990. [Industry equilibrium model.] Korteweg, A., “The Net Benefits to Leverage,” Journal of Finance, 2010.

2. Security Choice: Agency Problems & Asymmetric Information

M. C. Jensen and W. H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” JFE, 1976. [Asset substitution.] S. C. Myers, “Determinants of Corporate Borrowing,” Journal of Financial Economics, 1977. [Debt overhang/underinvestment.] D. W. Diamond, “Reputation Acquisition in Debt Markets,” Journal of Political Economy, August 1989. [Reputation as a solution.] S. C. Myers and N. S. Majluf, “Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have,” Journal of Financial Economics, 1985. [Asymmetric information/adverse selection.] S. A. Ross, “The Determinants of Financial Structure: The Incentive Signalling Approach,” Bell Journal of Economics, 1977. [Signaling.] M. C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers,” American Economic Review, May 1986. [Free cash flow problem.] R. Stulz, “Managerial Discretion and Optimal Financing Policies,” Journal of Financial Economics, 1990. [Attempt to formalize FCF idea.] Zwiebel, J., “Dynamic Capital Structure under Managerial Entrenchment,” American Economic Review, 1996. [Endogenous debt in free cash flow environment.]

3. Evidence *I. Shyam-Sunder and S. C. Myers, “Testing Static Tradeoff Against Pecking Order Models of Capital Structure,” Journal of Financial Economics, 1999. [Tradeoff versus pecking order theory.] *E. F. Fama and K. R. French, “Financing Decisions: Who Issues Stock?,” Journal of Financial Economics, June 2005. [Evidence against the “pecking order” theory.] M. T. Leary and M. R. Roberts, “Do Firms Rebalance Their Capital Structures?,” Journal of Finance, 2005. [Evidence for tradeoff model with adjustment costs.] J. Graham and C. Harvey, “The Theory and Practice of Corporate Finance: Evidence from the Field,” Journal of Financial Economics, 2001. [What managers say they do.] I. Welch, “Capital Structure and Stock Returns,” Journal of Political Economy, 2004. [Capital structure changes driven by stock price changes.]

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I. Strebulaev, “Do Tests of Capital Structure Theory Mean What They Say?,” Journal of Finance, 2007. M. Lemmon, M. Roberts, and J. Zender, “Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure,” Journal of Finance, 2008. M. Frank and V. Goyal, “Capital Structure Decisions: Which Factors Are Reliably Importance?,” Financial Management, 2009.

I. Strebulaev and B. Yang, “The Mystery of Zero-Leverage Firms,” Journal of Financial Economics, 2013. H. DeAngelo and R. Roll, “How Stable Are Corporate Capital Structures?,” Journal of Finance, 2015.

PART II. Security Design/Financial Contracting

4. Assigning Cash Flow

R. Townsend, “Costly State Verification,” J Economic Theory, 1979. [First CSV paper.] D. Gale and M. Hellwig, “Incentive-Compatible Debt Contracts: The One-Period Problem,” Review of Economic Studies, 1985. [Easier to understand than Townsend.] P. DeMarzo and Y. Sannikov, “A Continuous-Time Agency Model of Optimal Contracting and Capital Structure,” Journal of Finance, 2006. [Dynamic security design.] P. DeMarzo and M. Fishman, “Optimal Long-Term Financial Contracting,” RFS, 2007.

5. Assigning Control Rights

S. J. Grossman and O. Hart, “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,” Journal of Political Economy, 1986. [First paper using ‘residual rights of control’.] O. Hart and J. Moore, “Property Rights and the Nature of the Firm,” Journal of Political Economy, 1990. [The other foundational paper.] P. Aghion and P. Bolton, “An ‘Incomplete Contracts’ Approach to Financial Contracting,” Review of Economic Studies, July 1992. [Application of control rights to security choice.] O. Hart and J. Moore, “A Theory of Debt Based on the Inalienability of Human Capital,” Quarterly Journal of Economics, 1994, 841-879. M. Dewatripont and J. Tirole, “A Theory of Debt and Equity: Diversity of Securities and Manager-Shareholder Congruence,” Quarterly Journal of Economics, 1994.

6. Financial Intermediation

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D. Diamond, “Financial Intermediation and Delegated Monitoring,” Review of Economic Studies, 1984. [Monitoring rationale] D. Diamond and P. Dybvig, “Bank Runs, Deposit Insurance and Liquidity,” Journal of Political Economy, 1983. [Liquidity rationale] R. Rajan, “Insiders and Outsiders: The Choice between Informed and Arm’s-Length Debt,” Journal of Finance, 1992. S. Hanson, A. Shleifer, J. C. Stein, R. W. Vishny, “Banks as Patient Fixed-Income Investors,” Journal of Financial Intermediation, 2015. [A theory of what banks do.]

Part IV. Topics 7. Causal Inference 8. Investment-Cash Flow Sensitivity 9. Internal Capital Markets 10. Diversification 11. Takeovers 12. Business Groups 13. Finance, Development, and Politics 14. Governance and Control

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Instructor Profile John G. Matsusaka Education

B.A. Economics, University of Washington M.A., Ph.D. Economics, University of Chicago

Professional

Charles F. Sexton Chair in American Enterprise, 2009- Professor of Finance and Business Economics, USC Marshall School, 1991- Professor of Business and Law, USC Law School, 2004- Professor of Political Science, USC, 2005- Executive Director, Initiative & Referendum Institute at USC, 2004- Vice Dean for Faculty and Academic Affairs, USC Marshall School, 2007-2013 John M. Olin Visiting Professor of Economics, GSB, University of Chicago, 2001 Visiting Associate in Economics, California Institute of Technology, 2000 Visiting Scholar, Anderson School, UCLA, 1996 National Fellow, Hoover Institution, Stanford University, 1994-1995

Other Professional

Consultant on corporate governance, Council of Economic Advisors, Executive Office of the President, Washington D.C., 2002

Research in Finance and Governance

“Opportunistic Proposals by Union Shareholders,” with O. Ozbas and I. Yi, WP, 2016. “A Theory of Shareholder Approval and Proposal Rights,” with O. Ozbas, WP, 2016. “The Effect of Forced Refocusing on the Value of Business Groups,” with Y. Wang, WP, 2015. “When Are Outside Directors Effective?,” with R. Duchin and O. Ozbas, Journal of Financial Economics, 2010. “50+ Years of Diversification Announcements,” with M. Akbulut, Financial Review, 2010. “From Families to Formal Contracts: An Approach to Development,” with K. Kumar, Journal of Development Economics, 2009. “Decision Processes, Agency Problems, and Incomplete Information: An Economic Analysis of Capital Budgeting,” with A. M. Marino, Review of Financial Studies, 2005. “Internal Capital Markets and Corporate Refocusing,” with V. Nanda, Journal of Financial Intermediation, 2002. “Corporate Diversification, Value Maximization, and Organizational Capabilities,” Journal of Business, 2001 [Merton Miller Prize for “most significant paper.”]

9

Instructor Profile Oguzhan Ozbas Education

B.S. Industrial Engineering, Boğaziçi University M.S. Industrial Administration, Carnegie Mellon University Ph.D. Financial Economics, Massachusetts Institute of Technology

Professional

Associate Professor of Finance and Business Economics, USC Marshall, 2002- Visiting Associate Professor of Finance, Koç University, 2011-2012, 2013-2015 Treasury Associate, Ford Motor Company, Dearborn, MI, 1995-1998

Other Professional

Consultant to the Corporate Affairs Division, Organisation for Economic Co-operation and Development on the proxy advisory industry, Paris, France, 2014-15

Research in Corporate Finance and Governance

“Opportunistic Proposals by Union Shareholders,” with J. Matsusaka and I. Yi, WP, 2016 “A Theory of Shareholder Approval and Proposal Rights,” with J. Matsusaka, WP, 2016. “Executive Compensation and Deployment of Corporate Resources: Evidence from Working Capital,” with N. Aktas, E. Croci, and D. Petmezas, WP, 2015. “Information Acquisition, Resource Allocation and Managerial Incentives,” with H. Rantakari, WP, 2015. “Disclosure of Status in an Agency Setting,” with A. Marino, Journal of Law, Economics, and Organization, 2014. “Corporate Diversification and the Cost of Capital,” with R. Hann and M. Ogneva, Journal of Finance, 2013. “Club Deals in Leveraged Buyouts,” with M. Officer and B. Sensoy, Journal of Financial Economics, 2010. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis,” with R. Duchin and B. Sensoy, Journal of Financial Economics, 2010. “Evidence on the Dark Side of Internal Capital Markets,” with D. Scharfstein, Review of Financial Studies, 2010. “When Are Outside Directors Effective?,” with R. Duchin and J. Matsusaka, Journal of Financial Economics, 2010. “Integration, Organizational Processes, and Allocation of Resources,” Journal of Financial Economics, 2005.

Curriculum Vitae – Oguzhan Ozbas January 2016 Page 1 of 4

OGUZHAN OZBAS University of Southern California (213) 740-0781 (office) Marshall School of Business (213) 740-6650 (fax) 3670 Trousdale Parkway, BRI 308 www-bcf.usc.edu/~ozbas Los Angeles, CA 90089-0804 [email protected]

EMPLOYMENT Marshall School of Business, University of Southern California, Los Angeles, CA:

Associate Professor (with tenure), 2010 – present; Assistant Professor, 2002 – 2010. Graduate School of Business, Koç University, Istanbul, Turkey: Yapı Kredi Bankası Visiting Associate Professor, 2011-2012, 2013-2015. Ford Motor Company, Dearborn, MI: Treasury Associate, 1995 – 1998.

EDUCATION Ph.D. in Financial Economics

Massachusetts Institute of Technology, Sloan School of Management, 1998 – 2002 Dissertation: “Integration and Corporate Investment” Committee: Sendhil Mullainathan, David Scharfstein (Chair), Antoinette Schoar M.S. in Industrial Administration

Carnegie Mellon University, GSIA, 1993 – 1995 Ranked 1st, Graduated with Distinction

B.S. in Industrial Engineering

Boğaziçi University, Faculty of Engineering, 1989 – 1993 Ranked 3rd, Graduated with High Honors

FIELDS Corporate Finance, Internal Capital Markets, Economic Theory of Organizations,

Corporate Governance PUBLICATIONS “Integration, Organizational Processes, and Allocation of Resources,” Journal of

Financial Economics 75, 201-242 (2005).

“Evidence on the Dark Side of Internal Capital Markets,” with David Scharfstein, Review of Financial Studies 23, 581-599 (2010). “When Are Outside Directors Effective?” with Ran Duchin and John Matsusaka, Journal of Financial Economics 96, 195-214 (2010).

“Market Segmentation and Cross-Predictability of Returns,” with Lior Menzly, Journal of Finance 65, 1555-1580 (2010).

“Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis,” with Ran Duchin and Berk Sensoy, Journal of Financial Economics 97, 418-435 (2010).


“Club Deals in Leveraged Buyouts,” with Micah Officer and Berk Sensoy, Journal of Financial Economics 98, 214-240 (2010). “Corporate Diversification and the Cost of Capital,” with Rebecca Hann and Maria Ogneva, Journal of Finance 68, 1961-1999 (2013). “Disclosure of Status in an Agency Setting” with Anthony Marino, Journal of Economic Behavior and Organization 105, 191-207 (2014). “A Theory of Shareholder Approval and Proposal Rights” with John Matsusaka, Journal of Law, Economics, and Organization, conditionally accepted.

WORKING “Why Do Managers Fight Shareholder Proposals? Evidence from No-Action Letter PAPERS Decisions” with John Matsusaka and Irene Yi

“Opportunistic Proposals by Union Shareholders” with John Matsusaka and Irene Yi “The Economic Impact of Religion: Evidence from Ramadan Loans” with Cem Demiroglu, Rui Silva and Mehmet Fatih Ulu “Executive Compensation and Deployment of Corporate Resources: Evidence from Working Capital” with Nihat Aktas, Ettore Croci and Dimitris Petmezas

“Information Acquisition, Resource Allocation and Managerial Incentives” with Heikki Rantakari

WORK IN Efficiency of Internal Capital Markets and Antitakeover Laws PROGRESS Pricing of Brand Value TEACHING M.B.A. Core Corporate Finance: Financial Policies and Applications

M.B.A. and Undergraduate Elective Case Course in Corporate Financial Strategy Fall 2002 – present Ph.D. Courses in Corporate Finance Fall 2007 – present

FELLOWSHIPS & Review of Financial Studies Distinguished Referee Award, 2013 HONORS Walter A. Rosenblith Fellow, Massachusetts Institute of Technology, 1998-2002 Elliott Dunlap Smith Award, Carnegie Mellon University, 1995

Outstanding Academic Achievement Award, Carnegie Mellon University, 1995 Best Student-Teacher Award, Carnegie Mellon University, 1995 Beta Gamma Sigma, Carnegie Mellon University, 1995 Henry Ford II Scholar, Ford Motor Company, 1994 National Scholar of the Turkish Education Foundation, 1993-1995 TOBB Scholar of the Union of Commodity Exchanges of Turkey, 1989-1993


PROFESSIONAL Invited Presentations ACTIVITIES 2002: Harvard Business School, University of Illinois at Urbana-Champaign,

University of Minnesota, University of Southern California, University of Michigan, University of Texas Austin 2003: NBER Organizational Economics Conference, Koç University 2004: AFA Annual Meetings San Diego, University of California, Los Angeles 2005: AFA Annual Meetings Philadelphia, FMA Annual Meetings Chicago 2007: Bilkent University, NBER Summer Institute Corporate Finance, Michigan State University 2008: UCI-UCLA-USC Finance Day, University of Washington, Arizona State University 2009: EFA Annual Meetings Bergen Norway 2010: AEA Annual Meetings Atlanta, Napa Conference on Financial Markets Research, Sabancı University, Koç Finance Conference, University of New South Wales, Chinese University of Hong Kong, University of Hong Kong, Hong Kong University of Science & Technology, Financial Economics and Accounting Conference, Purdue University 2011: AFA Annual Meetings Denver 2012: ECCCS International Workshop, Finance UC 2nd International Conference, Olin Corporate Finance Conference 2013: AFA Annual Meetings San Diego, NBER Law and Economics Program, University of California, San Diego, University of Amsterdam, Ohio State University, Tsinghua Finance Workshop, China International Conference in Finance Shanghai, EFA Annual Meetings Cambridge UK, Borsa Istanbul Finance and Economics Conference 2014: AFA Annual Meetings Philadelphia, London School of Economics, Norwegian School of Economics, Bilkent University, WHU Otto Beisheim School of Management, University of Cologne, Kadir Has University 2015: Özyeğin University, Sabancı University 2016: Workshop on Corporate Governance and Investment at Sabancı University, Conference on Empirical Legal Studies at Duke University 2017: AFA Annual Meetings Chicago, UC Riverside, Tinbergen Institute, HEC Paris, Purdue University, BI Norwegian Business School

Program Committee Western Finance Association (2010-present) European Finance Association (2011-present)

Midwest Finance Association (2016) Financial Management Association (Napa 2012-present, Europe 2012, USA 2015 Track Chair) Society for Financial Studies Finance Cavalcade (2011) China International Conference in Finance (2013) Financial Economics and Accounting Conference (2004, 2012) Olin Conference on Corporate Finance (2013-present)

Discussions Financial Economics and Accounting Conference (2004) Utah Winter Business Economics Conference (2006) AFA Annual Meetings Chicago (2007) AFA Annual Meetings New Orleans (2008), Session Chair Conference on Empirical Legal Studies Los Angeles (2009) Michigan Mitsui Finance Symposium (2010) WFA Annual Meetings Victoria (2010)


AFA Annual Meetings Denver (2011) AFA Annual Meetings San Diego (2013) SFS Finance Cavalcade Miami (2013)

Tsinghua Finance Workshop (2013) China International Conference in Finance Shanghai (2013), Session Chair WFA Annual Meetings Seattle (2015) SFS Finance Cavalcade Toronto (2016), Session Chair FIRS Conference Lisbon (2016) FMA European Doctoral Student Consortium Helsinki (2016) Workshop on Corporate Governance and Investment (2016) Professional Membership American Economic Association American Finance Association Society for Financial Studies Western Finance Association REFEREE WORK American Economic Review, Economic Inquiry, Emerging Markets Finance and

Trade, Journal of Accounting and Economics, Journal of Economic Behavior and Organization, Journal of Economics and Management Strategy, Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Financial Intermediation, Journal of Law, Economics and Organization, Journal of Law, Finance and Accounting, Management Science, Quarterly Journal of Economics, RAND Journal of Economics, Review of Finance, Review of Financial Studies

DISSERTATION Sakya Sarkar, 2015 (Tulane University) COMMITTEES Chao Zhuang, 2014 (First Quadrant) Haitao Mo, 2013 (Louisiana State University)

Derek Horstmeyer, 2012 (George Mason University) Joshua Shemesh, 2011 (University of Melbourne) Salvatore Miglietta, 2010 (BI Norwegian School of Management) Breno Schmidt, 2009 (Emory University) Ran Duchin, 2008 (University of Michigan) Qing Ma, 2006 (Cornell University)

OTHER SERVICE Doctoral Program Committee, Recruiting Committee (Current)

Committee on Research and Faculty Recognition, Graduate Curriculum Committee, Recruiting Committee, Doctoral Qualifying Exam Committee, Doctoral Admissions Committee, Finance Seminar Series Organizer (Past)

2015 annual performance review usc m · 2017-04-07 · report generated on january 18, 2017 page 1...

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