PROFESSOR NAME David Beim
Professor Office Location:
Office Phone:
Fax:
E-mail:
Uris 312
212-854-3484
212-854-3816 dob1@columbia.edu
Office Hours: Tuesdays 9:00am-12:00pm
TEACHING ASSISTANT
Pablo Slutzky pslutzky17@gsb.columbia.edu
REQUIRED COURSE MATERIAL
Casebook readings (see below)
REQUIRED PREREQUISITES AND CONNECTION TO THE CORE
Core Course
Corporate Finance
Global Economic
Environment
Strategy Formulation
Connection with Core
Discounted cash flow analysis
Valuation of firms
Drivers of economic growth
Causes of inflation
Causes of financial crises and the role of regulation
Sources of economic value
Creation of value through strategy.
Students will be expected to have mastered these concepts and be able to apply them in the course.
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COURSE DESCRIPTION
This course is about countries well enough developed to attract capital and have significant financial markets but not fully modernized – countries like China, India, Turkey and Brazil – but also Greece. It explores the institutional foundations of financial markets and centers on the question: what factors make emerging financial markets (EFMs) different from developed financial markets?
The course focuses on four foundations needed by all effective financial systems: i. Legal structure. The most basic element is the legal foundation. Does the rule of law prevail at all, and if so what form does it take? Is there anti-fraud protection? What rights do lenders and security-holders have when things go badly? How efficient are the courts? Is there an independent securities market regulator? Why is bankruptcy important? ii. Information and control. Developed financial markets have institutions of information, which disseminate substantial amounts of data on companies that are used by investors to make informed decisions. Without accurate information, how do markets behave? Who monitors corporate performance, and who monitors the monitors? How well is self-dealing by insiders controlled and how? iii.
Inflation and currency. Many developing countries suffer at least a moderate degree of inflation, and a few suffer hyperinflation at least during certain periods. This profoundly affects the structure of markets and the way financial institutions make money. What is the best way to control inflation? Should currency values be fixed, floating, or managed in some mixed arrangement? iv.
Financial institutions. Banks are the central feature of most emerging financial markets, but are often riddled with bad loans, leading to massive value losses. We will examine the managerial issues associated with running effective financial institutions.
Finally, we turn to sovereign debt, banking and debt crises and joint crises of banks and currencies. We will look at defaults in Russia and Argentina, and debt sustainability problems in Brazil, Turkey and Greece.
COURSE OBJECTIVES
The goal is to provide a framework with which students can analyze and understand economic and financial issues in the developing world.
ASSIGNMENTS
The main deliverable is a research paper, which is written in teams of up to maximum four students. This is a Type A assignment with full collaboration and a single grade for all team members. The research paper focuses on one particular financial institution in a developing country. It is written in two parts, with revision of the first part after its return.
In addition there are three individual Type B assignments which students are to prepare by themselves. One involves an effort to value the Russian firm Gazprom in confusing informational conditions. The second is an assessment of the strategy and risks of Kenya’s Equity Bank. The third is a problem set on Greek debt dynamics.
All assignments are submitted online.
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METHOD OF EVALUATION
Class Participation
Assignments
Research Project
20%
30%
50%
CLASSROOM NORMS AND EXPECTATIONS
Class attendance and participation is important in this course – 20% of the grade, assessed both qualitatively and quantitatively. Each class includes a polling question, frequently at the start of the class, which serves to record attendance. Each student is expected to have a functioning clicker to respond to these questions. Everyone is expected to speak up and join the classroom discussions.
Students are expected to arrive in the classroom before the class begins. Late arrival will usually be recorded as absence.
CASEBOOK READINGS
Class #3:
Class #5:
Class #6:
Pettis, Michael, “How Much Investment is Optimal?” (May, 2013).
Frye, Timothy and Andrei Shleifer, “The Invisible Hand and the Grabbing Hand” (May, 1997).
Hayes, Samuel, “Czechoslovakia’s Privatization: The Fund Phenomenon” (February, 1994).
Class #7: India Committee on Financial Sector Reforms, Draft Report Summary (2008).
Class #8: Atanasov, Vladimir, Bernard Black and Conrad S. Ciccotello, “Unbundling and Measuring Tunneling”
(January, 2008).
Class #9:
Class #10:
DOB, “Champacoal” (July, 2008).
Gaddy, Clifford G. and Barry W. Ickes, “Russia’s Virtual Economy” (September, 1998);
DOB, “Gazprom” (April, 2011).
Class #11: Djankov, Simeon, Oliver Hart, Caralee McLiesh and Andrei Shleifer, “Debt Enforcement Around the
World” (2008).
Class #13:
Class #14:
Class #15:
Class #17:
Hinds, Manuel, “Playing Monopoly with the Devil” (2005)
The Economist Survey of Brazil (November, 2009).
DOB, “An Introduction to Bank Analysis” (May, 2013).
DOB and Murray Low, "Equity Bank” (June, 2011).
Class #21: Pomerleano, Michael, “The East Asia Crisis and Corporate Finances: The Untold Micro Story”
(November, 1998).
Class #22: Euromoney, “How to Engineer a Financial Gallows.” (2002); and The Economist Survey of Turkey
(October, 2010).
Class #23:
Class #24:
DOB, “Peregrine Investments” (December, 2006).
Ruchir Sharma, “Broken BRICs,” (November 2012).
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DAILY CALENDAR
1/29 1. Introduction to the course. A brief history of the developed world’s financial involvement with emerging markets. The 1980s debt crisis. Capital flows 1990-2011.
2/3 2. Economic growth. Why do some countries grow rapidly and some not at all? Globalization, convergence and inequality. Research projects part 1 assigned, due Class 11.
2/5 3. China: Growth by investment and exports. China’s growth model and China’s financial system. Is the growth model sustainable? (Reading: “How Much Investment is Optimal?”; 60 Minutes video segment: http://www.cbsnews.com/8301-18560_162-57572185/chinas-real-estate-bubble/ ).
2/10 4. Finance and growth. Does effective finance lead to growth? Indicators of financial development. Financial repression: what it is and why it happens. Research project proposals submitted.
2/12 5. Business and the state. What problems arise for firms under state ownership? What happened in the privatization wave of the 1990s? Government restrictions on businesses. The recent growth of state capitalism. (Reading: “The Invisible Hand and the Grabbing Hand”).
2/17 6. Case: “Czechoslovakia’s Privatization: The Fund Phenomenon.” (Reading: Czech case).
2/19 7. India: Growth by education and liberalization. India’s growth model and India’s financial system. India’s integration into the global economy and implications for financial flows. (Reading: India Committee on
Financial Sector Reforms, Draft Report Summary ).
2/24 8. Information in financial markets. Institutions of information. Institutions that control self-dealing by managers. (Reading: “Unbundling and Measuring Tunneling”). Gazprom valuation assigned, due in one
week.
2/26 9. Case: “Champacoal.” (Reading: Champacoal case).
3/3 10. Case: “Gazprom.” (Readings: Russia’s Virtual Economy, Gazprom case). Gazprom valuation due.
Law
3/5 11. Legal foundations of financial systems. The rule of law and corruption. Anti-fraud provisions and securityholder protection. The nature and meaning of bankruptcy procedures. (Reading: “Debt Enforcement
Around the World”). Research projects part 1 due.
3/10 12. Case: “Thai Petrochemical.” (Download case readings from Canvas).
[Break]
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3/24 13. Causes of inflation. Relationships among inflation, currency and interest rates. Fixed and floating currency regimes. Credibility and the Currency Trap. (Reading: “Playing Monopoly with the Devil”).
3/26 14. Brazil: Growth through currency and interest rate management. Brazil’s growth model and Brazil’s financial system. Current stresses on currency value and interest rates. (Reading: The Economist Survey of Brazil).
3/31 15. Banks. The relationships of government to banks. Causes of recurring systematic crises. What ratios and analytic tools help us to understand banks? When can one see trouble coming? (Reading: “An
Introduction to Bank Analysis”). Equity Bank writeup assigned, due in one week.
4/2 16. What makes financial institutions work? Protected franchises and competition. Strategies, risk management, growth and incentives. Discussion of selected research projects.
4/7 17. Equity Bank. (Reading: Equity Bank case). Equity Bank writeup due.
4/9 18. .Sovereign debt, public and external. Debt sustainability and the value of sovereign debt: The futility of debt buybacks. Greek debt exercise assigned, due in one week.
4/14 19. Guest speaker
4/16 20. How do debt crises get resolved? Consensual restructuring: the Brady Plan. Disorderly default: Argentina
2001. Public debt default: Russia 1998. Role of the IMF. Greek debt exercise due.
4/21 21. Twin crises. Joint collapses of banks and currencies. Twin crises as runs on developing country banks by international banks. Role of currency value, liquidity management and generalized moral hazard. The
Mexican crisis of 1994-1995. The East Asian crisis of 1997-1998. (Reading: “The East Asia Crisis and
Corporate Finances: The Untold Micro Story”).
4/23 22. Turkey: Growth and debt sustainability. The multiple sovereign debt / banking / currency crises in Turkey and how equilibrium was finally reached. (Readings: “How to Engineer a Financial Gallows” and The
Economist Survey of Turkey).
4/28 23. Peregrine Investments. (Reading: Peregrine case).
4/30 24. Conclusion. The future of emerging financial markets. Review of the course. (Reading: “Broken BRICs”).
Research papers due.
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