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Y2 - Finance 2

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Lectures

Week 2

Universiteit van Amsterdam · Economics and Business Economics

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Lecture 2A
Capital structure and financing choices
Capital Structure
Formalization: Modigliani & Miller I (capital structure irrelevance)
MM I: Law of one price and arbitrage
Chapter 14 - Conclusion
Lecture 2B
Debt overhang and leverage ratchet effect
Ways of mitigating agency costs: Debt Maturity and Covenants
Asymmetric Information and Adverse Selection
Adverse Selection leads to lemons...
Asymmetric information / mispricing, cont’d
Asymmetric information / mispricing – Conclusion
Issuing equity is negative signal....
How Do Firms Choose their Source of Financing? Pecking order!
Conclusion: Financial decisions matter because of imperfections...

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