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MSFI 440. Financial Decisions, Contracting & Value. 3 Units.

The firm is a nexus of contracts among its various stakeholders (managers, shareholders, debt holders etc.). In this course, we will examine how value is created, and how real world conflicts between the various stakeholders of a firm lead to deviations from "perfect world" solutions. For instance, you may have learned in basic corporate finance courses that it is optimal to invest in positive NPV projects. Real-world conflicts can make it sub-optimal for shareholders do so. We will examine such issues and ways to mitigate them. In particular, we will examine Valuation, Asymmetric Information, Agency Cost, Incentive Contracts and Performance Metrics, and, time permitting, also discuss Regulation, Reputation and the role of certifiers and the economic crises. The takeaway learnings from this course are: (a) Understanding how Value can be created or destroyed, (b) Measuring Value, (c) Understanding the links between capital structure and: asymmetric information, market reactions and signaling, agency and management incentives, taxes, shareholder-bondholder conflicts etc., (d) Understanding the links between payout policy and: informational content, market reaction, stock returns and signaling, clientele effects etc., and (e) Understanding the need for and the design of incentive mechanisms. Case studies will be used to reinforce learning. We will emphasize on links to real-world events. Prereq: For MSF-MSM and ACL-MSF students only.