Course Scope

This course focuses on the empirical literature of capital structure, the expected support of governments to banks as well as presentations of related scientific papers.

The aim is to cultivate critical thinking and familiarity with empirical literature and related sources of information. The focus will be on topics such as the capital structure of firms, trade-off and pecking order theory, determinants of financial leverage, implicit guarantees for bank debt and the effect of market discipline in the financial sector.

Course Outline

• Capital Structure: Empirical Literature
  • Capital Structure Theory
    • Modigliani and Miller’s irrelevance proposition
    • Trade – off theory
    • Pecking order theory
  • Static Trade-off Tests
  • Pecking Order Tests
  • Dynamic Trade-off Tests
  • Identification of Leverage Determinants
  • New Test for Detecting Leverage Determinants

• Implicit Guarantees for Bank Debt
  • Implicit guarantees: policy issues
  • Adverse feedback effects from sovereign to bank debt values and vice versa
  • Credit ratings as an indirect measure of the value of implicit guarantees
• Market Discipline in Banking

Suggested Reading

• Teacher’s Notes (eclass.unipi.gr)
• Agca, S., De Nicolò, G., Detragiache, E., 2007. Financial reforms, financial openness, and corporate borrowing: international evidence. Working paper 07/186, IMF.
• Andrade, G. and S. Kaplan, 1998 How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed. Journal of Finance, 53, 1443- 1493.
• Antweiler, W. and M. Frank, (2006), Do US Stock Markets Typically Overreact to Corporate News Stories?, Available at SSRN: http://ssrn.com/abstract=878091
• Booth, L., Aivazian, V., Demirguc-Kunt, A.,Maksimovic, V., 2001. Capital structure in developing countries. Journal of Finance 56, 87–130.
• Bradley, M., G. Jarrell, and E. H. Kim, 1984, On the Existence of an Optimal Capital Structure: Theory and Evidence, Journal of Finance 39, 857-878.
• Chirinko, R. and A. Singha, 2000, Testing Static Trade-off against Pecking Order Models of Capital Structure: A Critical Comment, Journal of Financial Economics, 58, pp. 417-425.
• De Jong, A., R. Kabir and Nguyen, T., 2008, Capital structure around the world: The roles of firm- and country-specific variables, Journal of Banking and Finance, 32, 1954-1969.
• Demirguc-Kunt, A., and V. Maksimovic, 1996. Stock Market Development and Firm Financing Choices. Word Bank Economic Review, 10, 341-369.
• Demirguc-Kunt, A., and V. Maksimovic, 1998. Law, Finance and Firm Growth. Journal of Finance, 53, 2107-2137.
• Demirguc-Kunt, A., Maksimovic, V., 1999. Institutions, financial markets and firm debt maturity. Journal of Financial Economics 54, 295–336.
• Eckbo, B. E., Masulis R.W., Norli, Ø., 2008, “Security Offerings”, in B. E. Eckbo, ed.: Handbook of Corporate Finance: Empirical Corporate Finance, chap. 6 (Elsevier/North-Holland, Handbooks in Finance Series).
• Fama, E., and K. French, 2002, Testing trade-off and pecking order predictions about dividends and debt, Review of Financial Studies 15, 1-33.
• Fama, E., and K. French, 2005, Financing decisions: Who Issues Stock?, Journal of Financial Economics 76, 549–582.
• Fan, J., Titman, S., Twite, G., 2012. An International Comparison of Capital Structure and Debt Maturity Choices. Journal of Financial and Quantitative Analysis 47 (1), 23-56.
• Faulkender, ,  Flannery,  M.,  Hankins,  K.  and  J.  Smith,  2012,  Cash  flows  and  leverage adjustments, Journal of Financial Economics 103(3), 632-646.
• Fischer, E., Heinkel, R. and J. Zechner, 1989, Dynamic capital structure choice: theory and tests, Journal of Finance 44, 19–40.
• Flannery, and  Rangan, K.,  2006,  Partial  adjustment  toward  target  capital structures, Journal of Financial Economics 79, 469–506.
• Flannery, ,  and  K.W.  Hankins,  2011,  Estimating  dynamic  panels  in  corporate  finance Available at SSRN: http://ssrn.com/abstract=1108684.
• Frank, M. and V. Goyal, 2003, Testing the pecking order theory of capital structure, Journal of Financial Economics 67, 217–248.
• Giannetti, ,  2003.  Do  better  institutions  mitigate  agency  problems?  Evidence  from corporate finance choices. Journal of Financial and Quantitative Analysis 38, 185–212.
• Goldstein, R., N. Ju, and H. Leland, 2001, An ebit-based model of dynamic capital structure, Journal of Business 74, 483-512.
• Graham, J., 2000, How big are the tax benefits of debt?, Journal of Finance 55, 1901-1941. Harris, M. and Raviv, A., 1991, The Theory of Capital Structure, Journal of Finance, 46, 297- 355.
• Hovakimian, A. and G. Li, 2012, Is the partial adjustment model a useful tool for capital structure research?, Review of Finance, 16, 733-754.
• Huang, R. and J. Ritter, 2009, Testing theories of capital structure and estimating the speed of adjustment, Journal of Financial and Quantitative Analysis, 44, 237-271.
• Kayan A. and S. Titman, 2007, Firms histories and their capital structures, Journal of Financial Economics, 83, 1-32.
• Lemmon, M., Roberts, M., and J. Zender, 2008, Back to the beginning: persistence and the cross-section of corporate capital structure, Journal of Finance 63, 1575-1608.
• Lucey, B.M., Zhang., Q., 2010. Financial integration and emerging markets capital structure. Journal of Banking and Finance 35, 1228–1238.
• Mitton, T., 2006. Stock market liberalization and operating performance at the firm level. Journal of Financial Economics 81, 625–647.
• Myers, S., and N. Majluf, 1984, Corporate financing and investment decisions when firms have information  investors  do  not  have,  Journal  of  Financial  Economics  13,  187-221.
• Rajan, R., Zingales, L., 1995, What do we know about capital structure: some evidence from international data Journal of Finance 50, 1421–1460.
• Schmukler, S.L., Vesperoni, E., 2006. Financial globalization and debt maturity in emerging economies. Journal of Development Economics 79, 183–207.
• Shyam-Sunder, L., and S.C. Myers, 1999, Testing static tradeoff against pecking order models of capital structure, Journal of Financial Economics 51, 219-244.
• Strebulaev, I.A., 2007, Do Tests of Capital Structure Theory Mean What They Say? Journal of Finance 62, 1747-1787.
• Warner, J.B., 1977, Bankruptcy costs: some evidence, Journal of Finance 32, 337-347.
• Weiss, L.A., 1990, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, Journal of Financial Economics 27, 285-314.