1st Edition

Corporate Finance and Capital Structure A Theoretical Introduction

By Kentaro Asai Copyright 2021
    104 Pages 15 B/W Illustrations
    by Routledge

    104 Pages 15 B/W Illustrations
    by Routledge

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    Capital structure choice is essential for an institution to maximize its value. Because the institution’s decision maker decides how to finance projects before making investment decisions, its financial decisions ultimately affect every aspect of operations thereafter. This book discusses several key theories of corporate capital structure to answer how funding structure shapes an institution’s value.

    In this book, the author emphasizes the microeconomic foundations of capital structure theory. He shows how various microeconomic frameworks, such as price and game theories, principal–agent model, and mechanism design, can be applied to solve the optimal capital structure of a firm. By getting used to optimizing corporate capital structures subject to various constraints via microeconomic frameworks, readers will become capable of investigating how to finance projects in their own setups. Thus, this book not only informs readers of specific knowledge but also provides them with tools to solve new problems that they will face in their future.

    This book will be a valuable resource for students of corporate finance at the postgraduate or doctoral level and will serve as the material for professional training aimed at practitioners and regulators with technical expertise.

    1. Introduction

    1.1 What This Book Is About

    1.2 Chapter Overview

    2. Capital Structure Choice in a Frictionless World

    2.1 Frictionless Capital Market

    2.2 Additivity and Uniqueness of Security Valuation

    2.3 Neutrality of Capital Structure

    2.4 Discussion

    3. Trade-Off Theory

    3.1 Criticism Against Modigliani and Miller

    3.2 Tax Benefit of Debt and Bankruptcy Costs

    3.3 Empirical Evidence

    3.4 Discussion

    4. Agency Theory

    4.1 Overview

    4.2 Safe Debt Can Mitigate Agency Problem

    4.3 Risky Debt Can Aggravate Agency Problem

    4.4 Debt Overhang and Risk Shifting

    4.5 Discussion

    5. Security Design

    5.1 Overview

    5.2 Optimal Risk Sharing with Moral Hazard

    5.3 Financial Contract Under Limited Liability

    5.4 Financial Contract Under Costly State Verification

    5.5 Optimal Allocation of Control Rights

    5.6 Discussion

    6. Asymmetric Information

    6.1 Overview

    6.2 Underpricing in IPO

    6.3 Signalling Through Retained Ownership

    6.4 Signalling Through Debt

    6.5 Pecking-Order Versus Trade-Off Theory

    6.6 Discussion

    7. Continuous-Time Model

    7.1 Overview

    7.2 Derivative Valuation Model

    7.3 Capital Structure Irrelevance Revisited

    7.4 Derivative Valuation Under Stationary Case

    7.5 Trade-Off Theory Revisited

    7.6 Discussion

    8. Capital Structure of a Bank

    8.1 Two Roles of a Bank

    8.2 Bank Run and Deposit Insurance

    8.3 Unintended Consequence of Deposit Insurance

    8.4 Capital Regulation

    8.5 Ongoing Debate on Capital Regulation

    8.6 Discussion



    Kentaro Asai joined Australian National University in 2016 as an assistant professor in the College of Business and Economics. He earned his PhD, MA, and BA with Honors in economics from the University of Chicago. He has published internationally in scholarly journals and policy reports in economics and finance. He is also a former security analyst at Goldman Sachs.