Financing Decisions & Market Efficiency | Part 4 – Principles of Corporate Finance (14th)

This unit explores the fundamental principles governing how corporations raise capital and the environments in which these financial decisions occur. It begins by contrasting investment decisions with financing strategies, emphasizing that while firms find value-adding projects in product markets, financing in efficient capital markets is typically a zero-sum game. The discussion centers on the Efficient Market Hypothesis and its three forms—weak, semistrong, and strong—detailing how information is incorporated into security prices and why stock price movements are characterized as random walks. Complementing this is an exploration of behavioral finance, which examines how psychological biases, such as loss aversion and over-extrapolation, contribute to market anomalies and affect investor sentiment. The curriculum moves into the practical structure of corporate financing, identifying internal funds as the primary source of capital and detailing the nuances of external instruments like common stock, preferred stock, and various forms of debt. You will learn the critical differences between seniority, security, and the mechanics of fixed versus floating interest rates. The role of financial intermediaries and the broader financial system is analyzed on a global scale, contrasting market-based and bank-based economies while also looking at the impact of the fintech revolution, including peer-to-peer lending and blockchain technology. Finally, the unit covers the lifecycle of security issuance, from the high-stakes world of venture capital and angel investing to the intricate process of an Initial Public Offering (IPO). Key topics include the duties of underwriters, the bookbuilding process, and the reasons behind the common phenomenon of IPO underpricing. It also addresses seasoned offerings, rights issues, and the signaling effects that occur when public companies announce new equity sales.


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