Financial Contracts

The theory of financial contracting analyzes situations in which capital markets are imperfect and financial decisions influence the cash flow, hence the value of firms, i.e. the Fisher separation does not hold. This will be the case when information is asymmetric or contracts are incomplete. It explains the features of financial arrangements, such as debt and equity, the allocation of control rights etc. which are taken for granted in more traditional finance theory. It offers reasons why firms worry about their capital structure and dividend policy, which would be irrelevant in perfect capital markets and explains the role of financial intermediaries such as banks.

The theory can be developed by stressing results, as it is usually done in the finance literature, or by stressing assumptions and modeling strategies, as it is more common in microeconomics and contract theory. The application driven approach has the advantage that the material can be organized around practical issues such as: capital structure, dividend policy, etc.; but it runs the risk of leaving students confused about the logical foundations of (sometimes contradictory) claims. Therefore, this course is organized around a small number of basic models, many of which form building blocks for more complex theories.

The course is for doctoral students and advanced master students, who have a research interest in the field of corporate finance. It consists of lectures and tutorials.

Participants are expected to have a solid knowledge of microeconomic theory and some previous exposure to game theory.

syllabus (pdf)

Material: The material is available on Moodle (course name: "Financial Contracting", key: "FC").