Corporate Finance Theory (F)

Course content

Some of the central issues in Finance relate to the financing decisions of firms, in particular the relative use of debt and equity financing. Key aspects of this capital-structure decision include the tax advantages of debt, costly bankruptcy, and signaling to the market. We also consider the market for corporate control, with leveraged buyouts as well as mergers and acquisitions.

When looking at financing decisions, we will pay particular attention to how conflicts of interest between managers, shareholders, and creditors can affect firm behavior.  Amongst other issues, we will consider how firms may take on excessive debt so as to pass bankruptcy costs on to certain creditors; opt for leveraged buyouts to take advantage of sponsor reputation; carry out liquidity mergers to avoid credit rationing; and use equity financing to mitigate information asymmetries with investors, or to reduce agency conflicts within the firm.


MSc programme in Economics – elective course

The course is part of the MSc programme in Economics, Financial line,  symbolized by ‘F’.

MSc programme in mathematics-economics

Learning outcome

Corporate Finance Theory builds on the investigation into firm capital structure from the third-year course Corporate Finance and Incentives. We take for granted that course participants have already received a full introduction to the principles of corporate finance. We now go deeper into the particular details of some of these arguments. In order to do so, we go beyond the textbook and base the course on classic and new articles from academic finance journals. The tools and knowledge obtained in this course are of immediate relevance for graduates seeking employment in the business and financial industries.  To successfully complete the course, students are expected to meet the following learning outcomes related to intuition, formal mathematical modeling, and application to cases.


  • Identify and summarize key theoretical concepts and results from academic articles (intuition)
  • Identify and evaluate key modeling assumptions in an advanced, mathematically-specified theoretical framework (formal modeling)
  • Assess whether various modeling assumptions are realistic in particular real-life settings (application to case)



  • Explain the economic mechanism underlying given theoretical results and discuss their interpretation (intuition)
  • Derive and analyze formal results within an advanced, mathematically-specified theoretical framework (formal modeling)
  • Argue whether theoretical insights from various articles can shed light on given real-life cases (application to case)



  • Compare and contrast theoretical concepts from different articles, and explain the key similarities and differences (intuition)
  • Argue to what extent the formal theoretical results derived in various articles relate to the articles’ more informal interpretation (formal modeling)
  • Identify new, relevant, real-life cases, and evaluate whether theoretical insights from various articles can shed light on these cases (application to cases)


The teaching activities will consist of lectures where students are expected to actively participate. This will include discussing questions in groups, submitting short answers and voting on multiple choice questions using the Socrative online system, and at times coming to the board.

To read approximately nine recently-published academic articles and working papers in the field of corporate finance. After an introductory lecture, we will devote approximately one week (two lectures) to each article, supplemented by in-class discussions of related real-world issues in corporate finance.

The preliminary reading list is as follows (subject to change). Links to these papers will be posted on the Absalon course homepage.

  1. Admati, DeMarzo, Hellwig, and Pfleiderer (2015). “The leverage ratchet effect.” Mimeo.

  2. Edmans and Mann (2015). “Financing Through Asset Sales.” ECGI – Finance Working Paper No.344/2013.

  3. Malenko and Malenko (2014). "A theory of LBO activity based on repeated debt-equity conflicts." Mimeo

  4. Banal-Estañol, Ottaviani, and Winton (2013). "The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination." Review of Financial Studies

  5. Almeida, Campello and Hackbarth (2011), “Liquidity Mergers,” Journal of Financial Economics, 102(3), 526–558.

  6. Povel and Singh (2010): “Stapled Finance,” Journal of Finance 65(3), 927–953.

  7. Bayar and Chemmanur (2011), “IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists,” Journal of Financial and Quantitative Analysis 46(6), 1755–1793.

  8. DeMarzo, Livdan and Tchistyi (2014), “Risking Other People’s Money: Gambling, Limited Liability, and Optimal Incentives,” Stanford Business School Working Paper No.3149.

Fahn, Merlo, and Wamser (2014), “The Commitment Role of Equity Financing,” CESifo Working Paper Series 4841.

Students will benefit from having passed the course "Corporate Finance and Incentives", or an equivalent elaborate introduction to Finance. Students should have a good understanding of the topics covered in Part 5 (Capital Structure) of the textbook “Corporate Finance” by Jonathan Berk and Peter DeMarzo, or in another book of a similar level.

2 hours lectures 1 to 2 times a week from week 36 to 50 (except week 42).

The overall schema for the Master can be seen at https:/​/​​economics_ma/​courses/​CourseCatalogue-E17/​Courseschema/​Pages/​default.aspx

Timetable and venue:
To see the time and location of lectures please press the link under "Se skema" (See schedule) at the right side of this page. E means Autumn.

You can find the similar information partly in English at
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-E17; [Name of course]””
-Select Report Type: “List – Weekdays”
-Select Period: “Efterår/Autumn – Weeks 31-5”
Press: “ View Timetable”

7,5 ECTS
Type of assessment
Written assignment, 14 days
individual take-home assignment, given in English and must be answered in English.
All aids allowed
Marking scale
passed/not passed
Censorship form
No external censorship
Criteria for exam assessment

The student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.

The final exam tests the students' knowledge, skills, and competencies in corporate finance theory, as described in the course learning outcomes.  Grading is on a pass/fail basis. In order to obtain a passing grade, students must demonstrate in a satisfactory way that they have met the learning outcomes related to all three relevant areas: intuition, formal mathematical modeling, and application to cases.

Single subject courses (day)

  • Category
  • Hours
  • Lectures
  • 42
  • Preparation
  • 134
  • Exam
  • 30
  • English
  • 206