Summary of "#Лето2020. Экономика. Корпоративные финансы, лекция 2 (Сергей Саркисян)"
Summary of the Lecture: “Лето2020. Экономика. Корпоративные финансы, лекция 2 (Сергей Саркисян)”
Main Ideas and Concepts
- Introduction to Capital Structure in Corporate Finance
Capital structure is a fundamental topic in corporate finance, focusing on how companies finance their assets through debt and equity. A company’s balance sheet consists of assets and liabilities (including equity), where assets always equal liabilities plus equity. Financing choices typically involve using internal funds first, then external financing through debt or equity.
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Types of Financing: Debt vs. Equity
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Debt Financing:
- Involves borrowing money via loans or issuing bonds.
- Debt must be repaid with interest.
- Debt has priority in bankruptcy (creditors paid before shareholders).
- Debt offers tax advantages because interest payments are tax-deductible (“tax shield”).
- Debt carries risk of default but does not dilute ownership.
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Equity Financing:
- Involves issuing shares.
- Equity holders are residual claimants, paid after debt holders.
- Equity is more expensive and dilutes ownership but carries no mandatory repayment.
- Issuing equity may signal negative information to the market (adverse selection).
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Modigliani-Miller Theorem (Without Taxes)
Under certain idealized conditions (no taxes, no bankruptcy costs, perfect markets), the value of a company is independent of its capital structure. The cost of capital and firm value remain constant regardless of the mix of debt and equity. This theorem is foundational but unrealistic because real markets have taxes, bankruptcy costs, and information asymmetries.
- Impact of Taxes on Capital Structure
Corporate taxes create an incentive to use debt because interest payments reduce taxable income. Personal taxes and other market imperfections complicate the picture. There exists an optimal debt level where tax benefits balance bankruptcy and agency costs. Miller’s extension of the theorem includes taxes and personal taxation, showing that tax advantages of debt increase its attractiveness but do not make 100% debt financing optimal.
- Bankruptcy and Default
If a company cannot meet its debt obligations, it may declare bankruptcy. Creditors have priority claims on assets. Bankruptcy imposes costs (legal, operational) that affect firm value. Limited liability protects shareholders from losing more than their investment.
- Signaling and Information Asymmetry
Debt issuance can signal company quality to the market (good firms more likely to take on debt). The “lemons problem” (Akerlof) illustrates how asymmetric information leads to adverse selection. Dynamic games and signaling models explain how companies communicate their type (good or bad) through financial decisions like debt levels. Separating equilibria occur when firms reveal their type through distinct financing choices; pooling equilibria occur when types cannot be distinguished.
- Dynamic Game Models with Incomplete Information
The lecture covered models where firms of different types (good vs. bad) choose debt levels strategically. The market forms beliefs based on observed debt levels. Equilibrium concepts such as perfect Bayesian equilibrium and separating equilibria were discussed. Punishments and incentives influence whether firms signal truthfully or try to mimic other types.
- Agency Problems and Corporate Control
Managers may act in their own interests rather than shareholders’ (moral hazard). Debt can discipline managers by forcing them to generate cash flows to meet obligations, reducing empire-building behavior. Shareholders can use debt as a control mechanism to align managers’ incentives.
- Oligopoly and Debt
In oligopolistic markets (e.g., Cournot competition), debt influences firms’ production decisions. Firms with debt may produce more to cover fixed obligations, potentially crowding out competitors. Debt thus affects market competition and firm strategy beyond financing.
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Practical Relevance and Limitations
Real-world capital structures are influenced by taxes, bankruptcy costs, agency issues, and market signaling. The Modigliani-Miller theorem is a benchmark but does not fully describe actual corporate behavior. Empirical work attempts to estimate optimal debt levels and test theoretical predictions. Corporate finance decisions are complex and context-dependent.
Detailed Methodology / Key Points
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Capital Structure Basics:
- Start with internal funds.
- If insufficient, choose between debt and equity.
- Debt includes loans, bonds, promissory notes.
- Equity involves issuing shares, diluting ownership.
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Debt Advantages:
- Tax shield: interest is tax-deductible.
- Does not dilute ownership.
- Priority in bankruptcy.
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Debt Disadvantages:
- Risk of default.
- Bankruptcy costs.
- Increased financial risk.
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Modigliani-Miller Theorem:
- Assumptions: no taxes, no bankruptcy costs, no information asymmetry.
- Firm value unaffected by capital structure.
- Cost of equity increases with leverage to offset cheaper debt.
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With Taxes:
- Debt becomes more attractive due to tax shield.
- Optimal capital structure balances tax benefits and bankruptcy costs.
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Signaling Models:
- Firms differ in quality (good vs. bad).
- Debt level signals firm type.
- Market updates beliefs based on observed debt.
- Separating equilibrium: different types choose different debt levels.
- Pooling equilibrium: types choose same debt level, market uncertain.
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Agency Theory:
- Managers may over-invest or build empire.
- Debt imposes discipline by requiring regular payments.
- Shareholders use debt to control managerial behavior.
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Oligopoly Effects:
- Debt influences production and competitive behavior.
- Firms with debt produce more to cover obligations.
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Practical Applications:
- Optimal debt level depends on tax rates, bankruptcy costs, agency costs.
- Empirical studies estimate these parameters.
- Corporate finance decisions must consider market signaling and control issues.
Speakers / Sources Featured
- Sergey Sarkisyan – Lecturer and primary speaker delivering the lecture.
- Franco Modigliani and Merton Miller – Nobel laureates and originators of the Modigliani-Miller theorem.
- References to economists and theorists related to:
- Akerlof (lemons problem)
- Agency theory scholars (e.g., Jensen and Meckling)
- Game theory experts (mention of perfect Bayesian equilibrium, dynamic games)
- Other unnamed economists and financial theorists discussed in the context of capital structure, signaling, and corporate control.
This lecture provides a comprehensive overview of corporate finance capital structure theory, focusing on the trade-offs between debt and equity, the foundational Modigliani-Miller theorem, the role of taxes, signaling under asymmetric information, agency problems, and strategic behavior in markets. It blends theoretical models with practical insights relevant to corporate financial decision-making.
Category
Educational
