The course is a continuation of Economics 215, Corporate Finance.  Some of the topics will be familiar from that earlier course, such as modern portfolio theory, efficient market theory, the Modigliani-Miller propositions, and the capital asset pricing model, all of which will be further elaborated in the seminar.  Behavioral finance, which was only mentioned in 215, will be discussed in detail in the advanced course and students will have an opportunity to explore selected topics in behavioral finance in detail (such as noise trader risk, market overreaction, forward discount bias, and the hubris hypothesis of corporate takeovers).  The basic course provided students with the skills necessary to performing valuation of firms, securities, and other assets.  The seminar provides an opportunity to enhance those skills by the application of appropriate valuation techniques to specific firms:  students are expected to perform a net present value analysis of at least one publicly traded firm and present their findings to the seminar. Students will further develop valuation procedures for private firms (including state owned enterprises that are not publicly traded), subsidiaries and other stand alone corporate assets, mergers and other restructuring arrangements, firms in "emerging" markets, and real options.

Behavioral finance will be a major focus of the seminar and students are expected to complete a semester paper that demonstrates their understanding of that literature.  In this regard, students who complete the seminar will gain a better understanding of the role of psychology, asymmetric information, and agency costs in the determination of firm value and the short-run movements of equity prices. Expect to hear statements that are blasphemous, from the standpoint of economic orthodoxy: the notion that markets are machine like manifestations of rational (robotic) agents will be challenged (with appropriate evidence from the real world).

The advanced seminar will make extensive use of case studies (most of which will be constructed by student participants during the semester based on the firms they have chosen for valuation analysis).  The case studies will allow students to come as close as possible, within the context of a classroom, to the experience of real world decision makers in corporations and investment banks, to recognize the uncertainty and ambiguity that is present in every such decision, and to strengthen skills at group brainstorming.  As in the case of all seminars,  students should be prepared, from the very first class and every class, to actively engage in discussions.

Course Objectives:
 
 

• Gain an understanding of behavioral finance
• Enhance skills at valuation of both public and private firms (including state owned enterprises)
• Learn to value real options
• Improve understanding of the role of asymmetric information in the financial markets
• Perform a complete valuation analysis of a publicly traded firm (using the net present value technique)
• Learn and test arbitrage pricing theory using regression analysis
• Extend knowledge of corporate decision making and restructuring learned in basic corporate finance

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Copyright © 1998-2002, Satya Gabriel, Economics Department, Mount Holyoke College.