Prerequisites
The course requires basic knowledge of corporate finance. Therefore, the core corporate finance course offered at the MSc in Finance Program is a prerequisite. The course will make use of firm valuation tools and also rely on previous knowledge of capital structure theories.
Course Learning Objectives
An unknown virus is slowly taking over the world: spreading out massively, killing many people and trapping others in hospitals. Governments have no choice but to put a halt to people's lives. Sales start to plummet, business losses hit record high, corporate debt starts to pile up, stock prices follow a downward trend... Firms are hopeless and do not have any other choice than cutting costs which starts with laying off employees. Unemployment rates start to rise, personal debt slowly accumulates, domestic violence surges? In a world experiencing such an unexpected economic shock, saving businesses can remedy many problems, but at the same time, it can also help inefficient firms to survive, draining resources from more productive parts of the economy.
Recently, the world has been challenged by two big economic crises. The impact of these crises was felt not only by U.S. businesses, but all around the world. The world's governments and central banks intervened in the markets to facilitate lending and to prevent a worsening of the recession. The 2008 financial crisis led to a record number of business bankruptcies all around the world. For instance, the number of business filings in the U.S. doubled from 28,322 in 2007 to 60,837 in 2009. The U.S. government had to bail out large and well-connected financial institutions such as AIG and Bear Stearns. The effects of the crisis quickly escalated to other industries, such as auto manufacturing, which also received similar public assistance.
The recent COVID-19 crisis displayed a different pattern in terms of the number of bankruptcies and the type of the public assistance. While the number of large bankruptcies went up, the total number of business bankruptcies went down in 2020 relative to 2019, thanks to the bazooka programs, bridging loans, security purchase programs, and financial assistance programs. Many countries around the world made temporary amendments to their insolvency laws in order to combat the adverse effects of the pandemic on affected businesses. Introductory corporate finance courses mainly focus on the costs of financial distress as one of the important determinants of optimal amount of debt in the capital structure. This elective course aims at understanding the strategic and financial means of avoiding financial distress, and if it becomes inevitable, what are the exit strategies available to the company.
The course will start by discussing the causes of financial distress and present both operational and financial strategies available to the management that can help a firm to avoid financial distress or mitigate its negative impact on the firm. We will explore various legal and out-of-court restructuring and recapitalization alternatives that a firm can use to emerge from financial distress as a healthy business. We will also look at financial distress from an investor's point of view and study how to invest into troubled companies. Finally, the course will discuss corporate governance issues in financially distressed firms and post-emergence performance.
Course content
Slide deck #1:
- Diagnosing the Problem: Causes and Costs of Financial Distress
- The Legal Dimensions of Corporate Bankruptcy
- Corporate governance in distressed firms and Post-Chapter 11 performance
Slide deck #2:
- Techniques for the Classification and Prediction of Financial Distress
- Investing in Financially Troubled Companies
Slide deck #3:
- Distressed Firm Valuation Using Traditional and Non-Traditional Models
- Value Sharing in Distressed Firms
The lecture notes are self-contained, therefore no textbook is required. Throughout the semester, I will also be uploading academic and newspaper articles as well as videos that provide us with real-life examples. Concepts will be built on top of each other therefore not studying the material on a daily basis might result in a poor understanding of the future chapters. You should find it helpful to read the relevant slides before we cover the material in class. Familiarizing yourself with the concepts before the class can help you evaluate your understanding of the class, absorb the new information more easily and think critically, raising more questions and developing thoughts about the subject.
