OSU COLLEGE OF BUSINESS ADMINISTRATION, Department of Finance
FIN 6053 Financial Theory and Corporate Policy
Course Syllabus Fall, 2006
Instructor:
Dr. Betty J. Simkins
Office and Phone:
336 Business Building; (405) 744-8625
Office Hours:
Mon/Wed, 11:00-11:45am and Tuesdays, 2:00-3:30pm or by appointment.
E-Mail:
simkins@okstate.edu
Webpage:
spears.okstate.edu/~simkins
Class Webpage:
spears.okstate.edu/~simkins /FIN6053/fin6053.htm
Textbooks/Materials:
Required: #1 Financial Theory and Corporate Policy, by Copeland, Weston, & Shastri,
Pearson/AddisonWesley, 4th edition, 2005.
Required: #2 The Chicago Guide to Your Academic Career, by CopelandGoldsmith, Komlos,
and Gold, University of Chicago Press, ISBN 0-226-30151-6, 2001.
Readings: Available on course webpage (see password protected section)
Additional texts for reference purposes (recommend particularly for finance PhD students): To
be announced in class
Course Description: This is a foundation theory class for PhD students and advanced masters
students. The course is designed in the lecture-discussion format. That is, you must be prepared to
discuss the material assigned for each meeting period. To facilitate this, a list of the textbook
assignments and readings are included with this syllabus. You must anticipate the readings for each class
and be thoroughly prepared to be an active participant.
Upon successful completion of this course, a student should be able to read, with a critical eye, most
practitioner oriented financial research and be able to follow the development of more advanced
theoretical research in finance and related areas. The course will trace the evolution of financial thought
from its origins in economics to the basis of modern day financial theory. Specifically, the seminar will
cover a broad range of topics beginning with an introduction to capital markets, investment decisions,
and utility theory and then proceeding into more advanced topics such as portfolio theory, CAPM, APT,
efficient capital markets, agency theory, capital structure theory and evidence, dividend policy theory and
evidence, and international financial management. Theoretical and empirical papers on the above topics
will also be covered. Finally, the course will conclude with coverage of unsolved issues in financial
economics and a discussion of the future of financial research.
Grading Procedures:
Homework Assignments, class participation, etc.
Research Paper & Article Presentation
Midterm & Final Exams
Total
Grading will be based on the following scale: 90% or
Below is failing.
20%
20%
60%
100%
above = A; 80-89%=B; 70-79%=C; 60-60%=D.
Course Policies: You are expected to attend and take part in each class period. It is part of the grading
procedure. You are expected to read all material before the class session in which it is discussed. Late
homework will be accepted if turned in by the following class period it was due, but will be counted off
½. Work not turned in during class the day it is due is considered late.
Students with Disabilities: If any member of the class believes that s/he has a physical, emotional, or
psychological disability and needs accommodations of any nature, the instructor will work with you and
the university Office of Student Disability Services (Stillwater: SU 315, 744-7116 v/t; Tulsa: 103 North
Hall, 594-8354) to provide reasonable accommodations to ensure that you have a fair opportunity to
perform in this class. Please advise the instructor of such disability and the accommodations as soon as
possible. You will need to also contact the Student Disability Services office in order to receive
accommodations. No accommodations will be made without prior notification.
Academic Dishonesty: University policy will be followed and strictly enforced.
FIN 6053: FINANCIAL THEORY AND CORPORATE POLICY
FALL 2006 TENTATIVE SCHEDULE
Week
Date
SUBJECT/ ASSIGNMENT
Articles are available on the course webpage, unless otherwise indicated. All chapters are
from Copeland, Weston, and Shastri unless otherwise noted.
1
Aug. 23
Course introduction
"The Streams of Financial Research and Their Interrelationships: Evidence from the
Social Sciences Citation Index", Financial Practice and Education 1994 by
Borokhovich, Bricker, and Simkins, 110-123.
“Agency Costs of Overvalued Equity” by Michael C. Jensen (paper, slides &
videostreaming file)
Chapter 1: Introduction: Capital Markets, Consumption, and Investment
Homework Due Next Week:
Problems 1-3 from Ch. 1 and
Answer the following questions from the Jensen video & article:
1(a) What is the agency problem (hint: see Ch.2); (b) What is overvalued equity
and what are the agency costs of overvalued equity?
2(a) What is Managerial Heroin? (b) Give examples of companies that fit this
concept.
3. What are potential solutions to the problems that Jensen discusses?
4. How do his words of wisdom relate to financial economics research? List
your ideas. Discuss how this may relate to specific streams of financial
research.
2
Aug. 30
3
Sept. 6
4
Sept. 13
5
Sept. 20
6
Sept. 27
7
Oct. 4
Chapter 2: Investment Decisions: The Certainty Case (Questions 3, 10)
Readings – “What’s Wrong with Modern Capital Budgeting” by Rene Stulz,
Financial Practice and Education, Fall/Winter 1999, pages 7-11
Homework Due Next Week:
Write the 5 Axioms of Uncertainty on an index card. Also, write the two stochastic
dominance laws with descriptions of stochastic dominance on another index card.
Write a one page summary of the Stulz article. Include how the article improves our
“real world” understanding of Chapter 2 concepts.
View videostreaming file about doing research and tips on academic careers (2)
Read Ch. 3 “The Mentor” from The Chicago Guide to Your Academic Career
Chapter 3: The Theory of Choice: Utility Theory Given Uncertainty
Homework Due Next Week: Ch. 3 Problems 5, 8, 9, 16
Chapter 4: State Preference Theory
Homework Due Next Week: Ch. 4 Problems 2 & 6 and read the articles assigned
Read Ch. 4 “Writing a Dissertation” from The Chicago Guide to Your Academic
Career
Chapter 5: Objects of Choice: Mean-Variance Portfolio Theory
Homework Due Next Week: Ch. 5 Problems 6, 8abc, 9. What does QED stand for?
Answer questions on the article by Markowitz
Chapter 6: Market Equilibrium: CAPM and APT
Homework/Readings – to be announced
Homework Due Next Week: Ch. 6 Problems 2, 4, 5, 9. Go over “Deriving the
Minimum Variance Set” handout and understand. Read article by Sharpe.
Read Ch. 5 “Landing an Academic Job” from The Chicago Guide to Your Academic
Career
Chapter 10: Efficient Capital Markets: Theory
Homework Assignment: Ch. 10 Problems 1, 2, 5, 7
Reading: to be announced
Oct. 11
FALL BREAK ON MONDAY AND TUESDAY OF THIS WEEK. No class because
Monday classes meet this day
8
Oct. 18
Complete any uncovered material
Midterm Exam
10
Oct. 25
Chapter 10: Efficient Capital Markets: Theory
Chapter 11: Efficient Capital Markets: Evidence
Ch. 11 P1
Read Ch. 6 “The Life of the Assistant Professor” from The Chicago Guide to Your
Academic Career
11
Nov. 1
Chapter 12: Information Asymmetry and Agency Theory
Homework/Readings – (1) Explain if 'Invasion" Excel file contradicts theories of mkt
efficiency, (2) Ch. 11 P2,3,4, (3) Read Jensen and Meckling, 1976, Journal of
Financial Economics, and be prepared to discuss PowerPoint SLIDES (4) Read
Ch. 12
Excel files illustrating market efficiency/reactions Excel file (invasion of FranceMay
10 1940) Excel WWII
Handout reading: Carter “The Market’s Reaction to Unexpected, Catastrophic Events: The
Case of Airline Stock Returns and the September 11th Attacks” Dave Carter and Betty
Simkins, Quarterly Review of Economics and Finance Vol. 44 (No. 4, Fall), 2004, 539-558.
12
Nov. 8
Chapter 15: Capital Structure and the Cost of Capital: Theory and Evidence
Ch. 15 Problems 2,3,5,7,19
Reading: “The theory and practice of corporate finance: evidence from the field” by Graham
and Harvey, JFE, 2001.
“Job Market Signaling” by Michael Spense, QJE Vol. 87 (3), 1973, pgs. 355-374.
“The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”, QJE Vol. 84 (3),
1970, pgs. 288-500.
“Agency Costs of Free Cash Flows, Corporate Finance, and Takeovers”, by Michael Jensen,
1976, American Economic Review.
13
Nov. 15
14
Nov. 22
15
Nov. 29
Chapter 16: Dividend Policy: Theory and Empirical Evidence
Homework/Readings – to be announced
Read Ch. 7 “Teaching and Research” from The Chicago Guide to Your Academic
Career
This class is the evening before Thanksgiving. We will discuss a class makeup
procedure. I do not want to hold class if any of you are traveling this evening and
must miss class.
Chapter 19: International Financial Management
Homework/Readings – P 1, 10b
Readings: “An Introduction to Exchange Rates and Currency Risk Management” by Paul Laux
16
Dec. 6
Chapter 20: Unsolved Issues, Undiscovered Territory, and the Future of Finance
Homework/Readings – none
Videostreaming file on Behavioral Finance (Terry Odean)
Read Ch. 8 “Tenure” from The Chicago Guide to Your Academic Career