Wednesday, July 11, 2007

Outlining my revamped corporate finance course

Here's the overview for students of my newly revamped corporate finance course. As I said in another post, for various reasons, including the good availability of a math primer course at the law school that covers basic finance math, I don't do that stuff in this course - I used to, but it was a big mess with only a couple of class sessions to spend and a heterogeneous class of 90 students. So, here is the current approach.

(In brackets I have included a number of hypothetical "markets" which have an effect on students, such as the labor markets or the markets in cultural production or the markets in personal relationships such as marriage - we don't study those, of course - this is a course on business and corporate finance - but I do include them in the overview of functional markets as examples of markets in which people participate without necessarily thinking of them as markets, such as marriage or art. Apart from getting students to think about a wider variety of things as having a market aspect, it also helps students to understand what I mean by "functional" markets in the business sector, such as the market for corporate control, which is nowhere an actual, physical market as such, but a market function carried out through proxy financial instruments such as stock.)

A Financial Instruments and Functional Financial Markets
Approach to Corporate Finance

(* means a core part of the course. [Bracketed] markets are there as examples of things not ordinarily thought of as markets, but which exhibit certain market characteristics - we won't be studying those, but they are present as examples. Markets with neither a * nor brackets will be touched on in the course of discussing other kinds of markets.)

The Market for Corporate Capital-Raising*
Equity Instruments
Common Stock
Preferred Stock (topic held over until later)

Debt Instruments
Bilateral Lending
Multilateral Lending and Public Issuance of Corporate Debt
Corporate Debentures
Corporate Bonds
Indentures and bond convenants
Multilateral Lending and the Private Placement of Corporate Debt
(held over until Private Equity discussion)

Preferred Stock
as Hybrid of Equity and Debt

Convertible Instruments
Convertible Debt
Convertible Preferred Stock

The Market in Credit (folded into Debt Instruments discussion)
Review of Debt Instruments
Other borrowers and lenders
Bank lending
Private equity lending (held over until Private Equity discussion)
Government and municipal bond debt
Securitization of credit assets (held over for securitization discussion)
The concept of leverage as an aspect of debt/credit
The option relationship of risk, return, and control in debt instruments

The Market in Securitization*
Securitization and periodic payments generally
Mortgage securitization
Credit card receivables securitization

[The Market for Services and Labor]
The market for corporate/entity services
The market for personal services and labor
Employment and unemployment; wages and inflation

[The Market in Love, Relationships, Marriage, Family, and Social Reproduction]
(No, we won’t be dealing with this at all, but listed for completeness.)

The Market in Real Property
Real estate markets and credit markets
Residential real estate markets
Commercial real estate markets
The integration of real property markets and other financial markets

The Market in Risk-Allocation and Derivatives*
Speculation and hedging and leverage concepts
Derivative securities generally
Forwards/Futures Contracts
Interest rate risk markets
Currency rate risk markets
Insurance markets

The Market in Commodities
Commodities markets in tangibles
Commodities markets in intangibles
Currency and forex markets
Private contractual transactions for sale of goods, services, everything

[The Market in Innovation and Intellectual Capital]
Intellectual property
The market in human intellectual capital and its educational reproduction

[The Market in Cultural Production]
Consumption and brand

[The Market in Political and Regulatory Power of Government]
Lobbying and the legal market
Bribery and the illegal market
The market in government monopolies and oligopolies

[The Market in Failure]
Entity bankruptcy and creditors' rights
Vulture funds and private equity
Personal insolvency, bankruptcy, and default

The Market in Corporate Control*
The problem of the public company
The LBO cycle

The Market in Private Equity*
The Private Equity cycle
Hedge Funds
Public companies, private equity and why the LBO cycle?

This course approaches corporate finance from two vantage points. First, what are the functional financial markets in the business world – not necessarily actual, real markets, but conceptual and functional markets for allocating resources? We will focus mainly on capital raising, credit, risk markets, securitization, control, and the private equity alternative, with less attention to the others listed. Second, what are the concrete financial instruments by which those functions are carried out, by which those functional and conceptual markets operate to carry out such functions as allocating corporate control, allocating risk, etc.? We want a practical understanding of the increasingly complicated instruments of finance – the contracts and agreements that underlie finance. But those instruments don’t make sense and don’t mean very much unless they are understood in the context of the financial market functions which they enable.

Functional financial markets and operational financial instruments, in other words. In the outline above, I have laid out a wide variety of markets in our social world, some of which have to do deeply with corporate finance in the traditional sense, others of which – even though, like the market in cultural production, are deeply involved with the business world, such as media conglomerates – do not seem to have much to do with the usual sense of corporate finance. They don’t, not in the traditional sense of stocks and bonds, and in fact we will leave them aside. But I list them for completeness’s sake – and also to emphasize that although we will not study them, in today’s financial world, in fact many of these supposedly unrelated “markets” in things like art or sport are, of course, big corporate business and are intimately tied up with “traditional” corporate finance of stocks and bonds.

Not so long ago it was considered astonishing that David Bowie would, so to speak, “securitize” himself, in the sense of selling for a price today the estimated revenues of his future record sales and royalty payments on his songs – a hybrid of art, entertainment, media, and very traditional finance – and nowadays it is a routine transaction. We are not going to spend the course thinking about marriage and family and art and all those other bracketed items above as “markets.” We will remain focused on corporate finance, broadly construed - this is a survey course, and it already covers a dizzying array of markets and instruments, in very quick-fire fashion. But I want us to be aware of how a functional markets approach includes more things that one might have thought, at least in principle. There are of course many others we might have included - markets related to development finance, for example, such as microcredit.

We will seek to understand the core financial markets and instruments against a fundamental question – why public companies for the deployment of these instruments in these markets, rather than private companies? How is it that business entities that separate ownership from control of enterprises, as public companies do, survive over private companies which unite the two? And why the LBO cycle moving capital back and forth between the two models of ownership and control? Those are vital questions today, as hedge funds and private equity takes on a more and more massive role in the economy.


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