Published
Papers
The
monthly volatility of IPO initial returns is substantial and fluctuates
dramatically over time. Moreover, the
monthly volatility of initial returns is significantly positively correlated
with monthly mean initial returns. This
contrasts strongly with the strong negative correlation between the mean and
volatility of secondary-market returns.
Consistent with IPO theory, our empirical findings suggest that
information asymmetry about the firm’s market value drives this positive
correlation. Specifically, months in which a greater portion of the
offerings are for companies for which information asymmetry is likely to be a
problem tend to have higher average initial returns and a higher volatility of
initial returns. Moreover, information asymmetry proxies are able to explain
much of the positive correlation between average initial returns and the
variability of initial returns, and the same proxies are significantly
associated with both the level and dispersion of initial returns at the firm
level.
Rogers and VanBuskirk [2008. Shareholder litigation and changes in disclosure behavior. Journal of Accounting and Economics 40, 3–73] examine changes in sued firms’ disclosure policies between the pre-lawsuit and post-lawsuit periods. They find that these firms decrease the magnitude and precision of disclosures following the lawsuits. The authors conclude that managers of sued firms perceive disclosure to contribute to (rather than decrease) the probability of being sued. While the evidence showing that the magnitude and precision of disclosure decreases post-lawsuit appears to be robust, I raise some questions about what we learn from this finding.
Institutional Versus Individual Investment in IPOs:
The Importance of Firm Fundamentals, with Laura Field. Journal of Financial and
Quantitative Analysis 44 (June 2009).
Consistent with institutions having an advantage over individuals, we
find that newly public firms with the highest levels of institutional
investment significantly outperform those with the lowest levels. While prior
literature has attributed much of institutions’ higher returns around various corporate
events to private information, we find that much of the difference simply
reflects better interpretation of readily available public information.
Individuals disproportionately invest in the types of firms that earn
significantly lower abnormal returns over the long-run. Individuals either
disregard or misinterpret the relevance of readily available public
information, and as a result, they bear the brunt of IPO underperformance.
Executive Stock Options and IPO Underpricing, with Kevin J. Murphy. Journal of Financial Economics 85 (July 2007)
In about one-third of US IPOs between 1996 and 2000, executives received
stock options with an exercise price equal to the IPO offer price rather than a
market-determined price. Among firms with such “IPO options”, 58% of top
executives realize a net benefit from underpricing:
the gain from the options exceeds the loss from the dilution of their pre-IPO
shareholdings. If executives can influence either the IPO offer price or the
timing and terms of their stock option grants, there should be a positive
relation between IPO option grants and underpricing.
We find no evidence of such a relation. Our results contrast sharply with the
emerging literature on managerial self-dealing at shareholder expense.
Does Disclosure Deter or Trigger Litigation?, with Laura Field and Susan Shu.
Journal of Accounting and Economics 39 (September 2005)
Securities litigation poses large costs to firms. The risk of litigation is
heightened when firms have unexpectedly large earnings disappointments.
Previous literature presents mixed evidence on whether voluntary disclosure of
the bad news prior to regularly scheduled earnings announcements deters or
triggers litigation. We show that the counterintuitive finding in prior
literature that disclosure triggers litigation could be driven by the endogeneity between disclosure and litigation. Using a
simultaneous equations methodology, we find no evidence that disclosure triggers
litigation. In fact, consistent with economic arguments, our evidence suggests
that disclosure potentially deters certain types of litigation.
Is the IPO Pricing
Process Efficient?, with G. William Schwert. Journal of Financial Economics 71 (January
2004)
This paper investigates underwriters’ treatment of
public information throughout the IPO pricing process. Two key findings
emerge. First, we find that public information is not fully incorporated
into the initial filing range. This finding suggests that the midpoint of
the filing range is not an unbiased predictor of the final offer price, as
prior literature has assumed. Second, public information is not fully
incorporated into the offer price, suggesting an inefficiency
in the IPO pricing process. However, further examination shows that these
statistically significant relations are relatively small in economic
terms. In other words, underwriters do fully incorporate most public
information throughout the pricing process.
Why Does IPO Volume Fluctuate
So Much? Journal of Financial Economics 67 (January 2003)
IPO volume fluctuates substantially over time. This paper compares the
extent to which the aggregate capital demands of private firms, the
adverse-selection costs of issuing equity, and the level of investor optimism
can explain these fluctuations. Empirical tests include both aggregate
and industry-level time-series regressions using proxies for the above factors
and an analysis of the relation between post-IPO stock returns and IPO
volume. Results indicate that firms’ demands for capital and investor
sentiment are important determinants of IPO volume, in both statistical and
economic terms. Adverse selection costs are statistically significant, but
their economic effect appears small.
Litigation Risk and IPO Underpricing, with Susan Shu. Journal of Financial Economics 65 (September
2002)
We examine the relation between litigation risk and IPO underpricing
and test two aspects of the litigation-risk hypothesis: (1) firms with higher
litigation risk underprice their IPOs by a greater
amount as a form of insurance (insurance effect) and (2) higher underpricing lowers expected litigation costs (deterrence
effect). To adjust for the endogeneity bias in
previous studies, we use a simultaneous equation framework. Evidence
provides support for both aspects of the litigation-risk hypothesis.
IPO Market Cycles: Bubbles or Sequential
Learning? with G. William Schwert.
Journal of Finance 57 (June 2002)
Both IPO volume and average initial returns are highly autocorrelated.
Further, more companies tend to go public following periods of high initial
returns. However, we find that the level of average initial
returns at the time of filing contains no information about that company’s
eventual underpricing. Both the cycles in
initial returns and the lead-lag relation between initial returns and IPO
volume are predominantly driven by information learned during the registration
period. More positive information results in higher initial returns and
more companies filing IPOs soon thereafter.
Working Papers
We find that the asset management division of a bank ‘listens’ to its own analysts’ recommendations of client firms that have recently announced a merger. In contrast, we observe no evidence of such a relation in the pre-merger announcement period or among non-advisor banks. Empirical results suggest that increased information sharing across divisions regarding the value of the acquirer, rather than pressure on both analysts and asset management divisions to support the acquirer, explain this result. Among banks most sensitive to conflicts of interest from the investment banking division, consistency across divisions is weakest. Finally, banks’ strategy of only listening to their analyst recommendations in times when the analyst is most likely to have value-relevant information and in cases where analysts’ likely conflicts of interest are lowest appears to be a profitable one. In sum, the value of interactions between divisions within a financial institution varies with both conflicts of interest and the information environment.