Corporate finance 1. Theoretical Approaches 1.1. Corporate Finance in Arrow-Debreu world Complete market, perfect market, perfect competition, symmetric information, private consumption Risk: risk sharing, risk pooling, technology shocks, individual vs aggregate shocks Lucas(1978): existence of equilibrium asset price Merton: continuous-time pricing model ption pricing Capital structure: debt/equity ratio Mehra-Prescott (1985) zle · Incomplete market Page 1 of 5
Page 1 of 5 Corporate Finance 1. Theoretical Approaches 1.1. Corporate Finance in Arrow-Debreu World • Complete market, perfect market, perfect competition, symmetric information, private consumption • Risk: risk sharing, risk pooling, technology shocks, individual vs aggregate shocks • Lucas (1978): existence of equilibrium asset price • Merton: continuous-time pricing model • Option pricing • Capital structure: debt/equity ratio • Mehra-Prescott (1985): equity premium puzzle • Incomplete market
1. 2. Asymmetric Information Akerlof(1970): market failure due to asymmetric information Spence(1973): signaling Rothchild-Stiglitz(1976): screening Myerson(1979): revelation principle and mechanism design 1.3. Agency problems Mirrlees(1974), Holmstrom(1978): unverifiable investment, IC conditions Standard contract theory: revenue-sharing contract e Multi-agent contract Optimal linear contract dynamic contract 1.4. Incomplete contract al proach p e Hart. Moors. Grossman allocation of control rights is an alternative mechanism Coase. Williamson: transaction costs Option contract: ex-post option Page 2 of 5
Page 2 of 5 1.2. Asymmetric Information • Akerlof (1970): market failure due to asymmetric information. • Spence (1973): signaling • Rothchild-Stiglitz (1976): screening • Myerson (1979): revelation principle and mechanism design 1.3. Agency Problems • Mirrlees (1974), Holmstrom (1978): unverifiable investment, IC conditions • Standard contract theory: revenue-sharing contract. • Multi-agent contract • Optimal linear contract • Dynamic contract 1.4. Incomplete Contract Approach • Hart, Moors, Grossman: allocation of control rights is an alternative mechanism • Coase, Williamson: transaction costs • Option contract: ex-post option
Ex-ante efficiency vs ex-post efficiency, negotiation, renegotiation, bargaining powers cooperative game theory 2. Various business formats 2.1. Corporation Reality(berle-Means 1932): large modern corporations tend to have separated ownership and control Separation of management and ownership Separation of income and control rights Economists: ownership and control should be bundled together 2.2. Equity Joint Venture Popular in foreign direct investment Incentive and risk sharing issues Choice for a long-term cooperation? 23 Contractual Joint Venture Popular in the initial stage of foreign direct investment Page 3 of 5
Page 3 of 5 • Ex-ante efficiency vs ex-post efficiency, negotiation, renegotiation, bargaining powers, cooperative game theory 2. Various Business Formats 2.1. Corporation • Reality (Berle–Means 1932): large modern corporations tend to have separated ownership and control. • Separation of management and ownership • Separation of income and control rights • Economists: ownership and control should be bundled together. 2.2. Equity Joint Venture • Popular in foreign direct investment • Incentive and risk sharing issues • Choice for a long-term cooperation? 2.3. Contractual Joint Venture • Popular in the initial stage of foreign direct investment
Incentive and risk sharing issues No need for law protection Choice for a short-term cooperation? 2. 4. Venture Capital Popular in high-tech industries CroSs-border venture capital. a new trend? 2.5. Franchising Popular in retails and food chains Transaction costs of management, asymmetric information and incentives 2.6. Partnership a dying format? Dominated by the corporation format? 2.7. Outsourcing What are the issues? Page 4 of 5
Page 4 of 5 • Incentive and risk sharing issues • No need for law protection? • Choice for a short-term cooperation? 2.4. Venture Capital • Popular in high-tech industries. • Cross-border venture capital, a new trend? 2.5. Franchising • Popular in retails and food chains. • Transaction costs of management, asymmetric information, and incentives 2.6. Partnership • A dying format? Dominated by the corporation format? 2.7. Outsourcing • What are the issues?
3. applications 3.1. Venture Capital Popular mechanisms: staged financing, options, convertible securities, warrants, board representations, voting rights, IPO Importance: E. g, in Jiangsu province, 99% of firms, 80% of output and 65% of labor depend on venture capital 3. 2. Foreign direct investment ·合资,合营,合作,独资, franchising, outsourcing Purpose: understanding and policy analysis 3.3. Private-Public Partnership Purpose: partial privatization for roads, bridges, tunnels, rail ways, water, electricity, rli Mechanisms: ownership arrangement, regulation, tax incentives, price control, lease purchase guarante Page 5 of 5
Page 5 of 5 3. Applications 3.1. Venture Capital • Popular mechanisms: staged financing, options, convertible securities, warrants, board representations, voting rights, IPO • Importance: E.g., in Jiangsu province, 99% of firms, 80% of output and 65% of labor depend on venture capital 3.2. Foreign Direct Investment • 合资, 合营, 合作, 独资, franchising, outsourcing • Purpose: understanding and policy analysis 3.3. Private-Public Partnership • Purpose: partial privatization for roads, bridges, tunnels, railways, water, electricity, airlines • Mechanisms: ownership arrangement, regulation, tax incentives, price control, lease, purchase guarantee