This is an advanced course in corporate finance. The course studies financial institutions, financial crises, and the design of financial contracts. The economic role of various types of debt contracts is one theme. The strategic effect of the bankruptcy and reorganization process is another. The perspective is that of the chief financial officer (CFO), who must choose a source of funds, choosing between issuing securities directly to the public versus borrowing from an intermediary such as a bank or insurance company.
The course begins with models of the role of debt contracts and bankruptcy. It then considers in detail the issue of reorganizing firms in financial distress. One focus is on the effects various financial contracts have on the bargaining power of borrowers and of lenders.
The role of financial intermediaries in facilitating this reorganization is developed: this is a study of the corporate finance role of banks. The course also studies risk management and hedging policies in firms and banks. It considers the risk management goals that ought to be selected by firms. Several cases examine the restructuring of distressed firms and financial institutions.
The course examines consequences of a bank's corporate finance role for its other operations. A related topic is the method by which liquidity is provided by financial markets and by financial institutions. Providing liquidity by offering short-term debt may leave banks exposed to the risk of a financial crisis. We examine recent financial crises, including the Asian debt crisis, the problems of hedge funds in the United States, and the sub-prime mortgage credit crisis of 2007-2010 in this light.
More than half of the course is related to bankruptcy and reorganization, but it is not in any sense a bankruptcy law course. The course is a mix of concepts (economic models) and applications.