FIN 423 -- Corporate Finance Policy & Control
Reading List and Course Outline

Spring 1995

Prof. G. William Schwert
3-110L Carol Simon Hall, 275-2470

This course will cover the theory and evidence concerning major corporate financial policy decisions. FIN 413, "The Theory of Finance," is a corequisite for FIN 423. FIN 413 covers topics such as bankruptcy costs and agency costs that relate to capital structure and dividend policy. FIN 423 discusses alternative methods of issuing and retiring securities, mergers and acquisitions, and the market for corporate control. The required text for this course is:

It contains discussion of many topics that will not be discussed at length in class (for example, principles of valuation in Chapter 6.) You should use it as a reference if you have a question related to the course that is not covered in the required readings. Some of the required and supplemental articles are contained in the readings book edited by Donald Chew,

If you do not already own this book, you should purchase a copy in the bookstore (this book has been required for FIN 413 in recent years.) Articles in the Chew book are indicated by "DC" in the list below. Required readings are indicated by an asterisk "*". You will be provided with copies of those required readings that are not included in DC. In addition, the relevant sections from the book,

are listed as supplemental readings. This book has been used in most recent offerings of FIN 402, Capital Budgeting and Corporate Objectives, which is a prerequisite for FIN 423. Finally, and perhaps most important, I would like all of the students in the class to read the Wall Street Journal on a regular basis since the topics covered in this course are discussed regularly in this newspaper. The discussion of "current events" will be a major part of some lectures.

In addition to FIN 402 and 413, FIN 411 (Portfolio Theory and Capital Markets) is a prerequisite for this course. FIN 411 teaches students how to evaluate the response of security prices to information events ("event studies"). Since much of the evidence in FIN 423 depends on understanding event study methods, it is important that you have satisfied the FIN 411 prerequisite. If you have not already taken FIN 402, 411 and 413 (or you are not simultaneously taking 413), you are responsible for making up these deficiencies in your background.

My expectations are that students will come to class prepared by having read the necessary material. The lectures will not rehash the readings. Rather, we will discuss different perspectives on the arguments presented in the readings. Active, high quality class participation will enhance the grades of students who are near margins in the final grade distribution.

I will hand out notes to accompany many of the lectures. I will also hand out sets of stories reproduced from the popular business press (e.g., the Wall Street Journal). Class attendance is not required, but it is certainly encouraged and recommended. If you know that you have to be late for class, or leave early, please show courtesy to me and the rest of the class by entering and leaving the room as discretely as possible. If you miss a class, or are late in arriving, it is your responsibility to obtain copies of any handouts that were distributed in class. I suggest that you form study teams and help each other out -- get extra copies of handouts for missing team-mates. I will not provide a long-term inventory of class hand-outs for people who miss class.

The grading for this course will be based on a midterm exam on Thursday, April 27 (about 25%), a final exam during the period from June 1-4 (about 50%), and on two case problems that will be done in groups of between 3 and 5 people (about 25%). The case problems will involve an analysis of: (1) a security offering (e.g., an IPO), and (2) a merger/acquisition (M&A) problem. Either case could involve negotiation with an opposing team. The total group score for the cases equals the average case score times the number of students in the group. On the last day of class (May 30), each group will turn in their grade-allocation sheet containing:

  1. the percentage (summing to 100%) of the total group score that each member by name is to receive towards his/her final grade, and
  2. the signature of each group member.
If one group member's signature is missing, the grade allocation sheet is valid and binding on all members. If two or more signatures are missing, the allocation sheet is invalid and the groups' score will be allocated equally among the members. I will not arbitrate disputes among group members.

Exams (April 28 and June 3-6) are a required part of the course schedule. If you anticipate problems in attending either the midterm or the final exams, please do not take the course. Special scheduling provisions will be made only for unexpected dire personal emergencies (and the decision of what qualifies is mine).

In addition, M.B.A. students have the option of writing a paper that can count for up to 30% of their grade (you must specify the fraction when you hand in the paper). The weight given to the midterm and final exams and the case problems will be reduced proportionately. If you took FIN 433 (and therefore did a lot of case work), you have the option of substituting your paper for the case work in the course, but you must receive prior approval from me for this option (and approval of your paper topic). Ph.D. students must write a paper and will not participate in the case problems. The paper should be between 5 and 15 typed pages and it is due on Tuesday, May 30 in class. The topic of the paper can be anything related to the course. I will approve paper topics that are unconventional, but you do not need to ask permission to write a paper on a topic similar to those listed below. In general, these papers should simulate a business research report to your boss. For example, if you are analyzing a potential merger, you might pretend that you are a junior staff member of an investment banking firm (or one of the companies involved in the transaction), and I (your boss) have asked you to report your analysis and recommendations concerning the merger (for example, Is the price a 'good' one? Why? What are the purported gains from this merger? Does the stock market think it is a wise transaction for our company or the other company? Are there likely to be regulatory problems or litigation? etc.) You may ask for general guidance as you might ask your boss, but don't come and ask me what you should write because I (your boss) expect you to be able to do this analysis yourself. Examples would be:

  1. an event study on price performance of new issues in 1991, 1992, 1993 or 1994;
  2. a case study (similar to Ruback's papers on Conoco or Cities Service) on a major acquisition, spin-off, or proxy fight. Students in past years have studied Chase-Lincoln, Norstar-Security, Xerox-Crum & Forster, Computer Consoles-N.B.I., and Kodak-Sterling Drug;
  3. a case study of the performance of a successful merger or tender offer from 1 to 5 years after it was completed;
  4. or any other topic that I approve.
Additional journal articles, which are not required, are included for students who want more in depth information on particular topics. These are not on reserve in the library, although copies of the Journal of Financial Economics and the Journal of Finance are available in the Management Library.

Topics and Readings

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