Dynamic Corporate Finance: Liquidity and Risk Management Perspective
Dynamic Corporate Finance: Liquidity and Risk Management Perspective
Programme
Title: Dynamic Corporate Finance: Liquidity and Risk Management Perspective
Professor Wang Neng (Columbia Business School)
Abstract:
Two fundamental concepts in corporate finance are the net present value (NPV) rule and the Modigliani-Miller (MM) irrelevance proposition. When financial markets operate without frictions, when investors can trade securities that correspond to all relevant risks, when investors and managers share the same information, when incentives are aligned, and when there are no tax distortions, then corporate finance boils down to a valuation exercise and a simple investment decision rule: undertake all investments with a positive NPV. How companies and investments are financed is irrelevant.
This characterization of financial markets is frequently taken as approximately valid; a plausible and convenient simplification even if it poorly reflects reality. Corporate income taxation, the interest tax shield for debt, and bankruptcy costs are often the only deviations from this view that are considered when explaining corporate financing choices.
Although tax distortions and bankruptcy costs are obviously relevant, they cannot alone account for most observed corporate financial decisions. They cannot explain why companies hold so much cash, their leverage dynamics, nor their payout, equity issuance, and investment policies.
In this lecture series, we focus on how liquidity and risk management considerations inevitably arise in Corporate Finance. We introduce several different yet related approaches of Dynamic Corporate Finance. We focus on the unifying theme, the role of marginal value of liquidity, across these models. We will show in our research that the cost of issuing equity is a key and practically relevant distortion. Because of asymmetric information or incentive misalignment, firms must incur costs when raising external funds and these costs are higher for equity than for debt financing.
We will also cover several workhorse models in Dynamic Corporate Finance with a focus on the economic and finance insights.
About the Speaker
Neng WANG is Chong Khoon Lin Professor of Real Estate and Finance at Columbia Business School. He is also a Research Associate at the National Bureau of Economic Research (NBER) and a Senior Research Fellow at Asian Bureau of Financial and Economics Research (ABFER). He is an Associate Editor at the Journal of Finance and was an Editor in the Finance area at the Management Science. He won a Smith-Breeden Distinguished Paper Prize awarded by the Journal of Finance, and the Bettis Distinguished Scholar Award from Carey School of Business, Arizona State University. His research interests include corporate finance, asset pricing, macroeconomics, sovereign debt and international finance, risk management, entrepreneurial finance, household finance, wealth distribution, private equity, hedge funds, investor protection, real estate finance, FinTech, and the Chinese economy. He received B.S. in Physical Chemistry from Nanjing University, China in 1992, M.S. in Chemistry from California Institute of Technology (Caltech) in 1995, M.A. in International Relations from the University of California, San Diego (UCSD) in 1997, and Ph.D. in Finance from the Graduate School of
Business at Stanford University in 2002. He was born in Anhui, China in 1973.
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