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Financial Markets and Decisions 2

Module description

Summary:

The pair of modules BEE2027)and BEE3034 present the theory of decision-making under risk and the economics of information, discussing applications of the theory in the areas of banking and finance. The topics covered include expected utility theory, adverse selection, moral hazard, the Modigilani-Miller theorems and the incentive effects of debt and equity.
Applications are discussed including auctions and insurance. Additional Information:

Internationalisation

The module content is globally relevant as it theoretically discusses financial markets, international trends in corporate finance and governance, and comparative studies through up-to-date research.

Employability
Students acquire several skills valued by employers, including a theoretical knowledge and understanding of financial markets, the application of theory, the ability to think like an economist, and designing firm level policies.

Module aims - intentions of the module

The module presents the theory of decision-making under risk and the economics of information and to discuss applications of the theory in the areas of banking and financial markets. The topics covered include expected utility theory, adverse selection, moral hazard, the Modigliani-Miller theorems and the incentive effects of debt and equity.

Intended Learning Outcomes (ILOs)

ILO: Module-specific skills

On successfully completing the module you will be able to...

• 1. understand key concepts of decision-making under uncertainty, the impact of uncertainty on firms and impact on financial markets.
• 2. understand the choice between debt and equity financing. How financial decisions are affected by asymmetric information.

ILO: Discipline-specific skills

On successfully completing the module you will be able to...

• 3. understand the causes and consequences of moral hazard and adverse selection in financial markets.

ILO: Personal and key skills

On successfully completing the module you will be able to...

• 4. think analytically about financial markets and firms. Formal modelling of decisions and financial markets.
• 5. study a range of teaching and research material and to work independently.

Syllabus plan

• The Financial Structure of the Firm. 
• The Market for Lemons
• Financial Signalling 
• Moral Hazard and Incentives
• Incentive effects of debt and equity, 
• Behavioural Finance 
• The market for corporate control

Learning activities and teaching methods (given in hours of study time)

Details of learning activities and teaching methods

Formative assessment

Summative assessment (% of credit)

Details of summative assessment

Details of re-assessment (where required by referral or deferral)

Indicative learning resources - Basic reading

Basic reading:

Milgrom, P. and Roberts, J. (1992) Economics, Organization and Management, Prentice Hall.

J. Tirole, The Theory of Corporate Finance, MIT Press, 2005.

Eichberger, J and Harper, I. (1997). Financial Economics, OUP.

Key words search

Financial markets, credit rationing, debt-equity ratio, Modigliani and Miller theorem, asymmetric information, complete and incomplete asset markets, Pareto efficiency