IPO underpricing and after-market liquidity

The underpricing of the shares sold through Initial Public Offerings (IPOs) is generally explained with asymmetric information and risk. We complement these traditional explanations with a new theory. Investors who buy IPO shares are also concerned by expected liquidity and by the uncertainty about its level when shares start trading on the after-market. The less liquid shares are expected to be, and the less predictable their liquidity is, the larger will be the amount of "money left on the table" by the issuer. We present a model that integrates such liquidity concerns within a traditional framework with adverse selection and risk. The model's predictions are supported by evidence from a sample of 337 British IPOs effected between 1998 and 2000. Using various measures of liquidity, we find that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing, after controlling for variables traditionally used to explain underpricing.liquidity, initial public offering, post-IPO market, after-market trading

Lil hinn mill-miti tal-privatizzazzjoni u nazzjonalizzazzjoni

Jiena nixtieq inkompli ma' dak li qal il-Professur Joe Friggieri fejn qal li l-aspett kulturali ma jistax jinjora l-istrutturi ekonomiċi. Proprju fil-qasam ekonomiku wieħed ma jistax jinjora l-aspetti soċjo-kulturali ta' pajjiżna. Biex nibda fuq din il-laqgħa, naħseb li jkun ħafna pożittiv li l-affarijiet li qed jintqalu, u li ilna nisimgħu ħafna snin, ngħaddu biex xi darba nibdew inwettquhom. U wara kollox, it-twettiq konkret ta' l-ideat biex jiġu mibdula gradwalment l-istrutturi tas-soċjeta tagħna hija bla dubju ta' xejn l-isfida laktar importanti. Fil-qasam ekonomiku pajjiżna għaddej minn tibdil mgħaġġel u radikali. Il-pressjoni sabiex tiddaħħal aktar kompetittivita' permezz tal-liberalizzazzjoni, l-ispinta lejn il-privatizzazzjoni, it-twaqqif ta' ċentru finanzjarju internazzjonali, it-tibdila fis-sistema fiskali ta' pajjiżna flimkien ma' ristrutturazzjoni industrijali huma kollha xhieda, fit-tajjeb u fil-ħażin, ta' dan it-tibdil. Huwa neċessarju allura li wieħed jirrifletti ftit fuq l-għan finali li jrid jintlaħaq, il-metodu li għandu jintużax u il-kunflitti soċjali li jistgħu jinħolqu. Bażikament qed nitkellem fuq il-preżenza ta' l-istat u l-fruntieri tas-suq. Fi ftit kliem irridu niddiskutu r-relazzjoni Gvern-ċittadin bl-implikazzjonijiet kollha tagħha f'termini ta' l-attivita' ekonomika, fiskali, soċjali u kulturali. L-isfida qiegħda proprju f'kemm il-Gvern jista' joħloq l-ambjent ġust fejn iċ-ċittadin, kull ċittadin, speċjalment dak li ħafna jsibuh bħala ż-żgħir, l-emarġinat, ikollu l-opportunita' kollha li jwettaq il-proġetti tiegħu.peer-reviewe

Inheritance Law and Investment in Family Firms

Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance law affects investment only in family firms that experience a succession.Succession, Family Firms, Inheritance Law, Growth, Investment

Inheritance Law and Investment in Family Firms

Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance laws affects investment only in family firms that experience a succession.succession, family firms, inheritance law, growth, investment

A comprehensive test of order choice theory: recent evidence from the NYSE

We perform a comprehensive test of order choice theory from a sample period when the NYSE trades in decimals and allows automatic executions. We analyze the decision to submit or cancel an order or to take no action. For submitted orders we distinguish order type (market vs. limit), order side (buy vs. sell), execution method (floor vs. automatic), and order pricing aggressiveness. We use a multinomial logit specification and a new statistical test. We find a negative autocorrelation in changes in order flow exists over five-minute intervals supporting dynamic limit order book theory, despite a positive first-order autocorrelation in order type. Orders routed to the NYSE’s floor are sensitive to market conditions (e.g., spread, depth, volume, volatility, market and individual-stock returns, and private information), but those using the automatic execution system (Direct+) are insensitive to market conditions. When the quoted depth is large, traders are more likely to “jump the queue” by submitting limit orders with limit prices bettering existing quotes. Aggressively-priced limit orders are more likely late in the trading day providing evidence in support of prior experimental results

Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies

In this paper, we investigate whether U.S. bank holding companies (BHCs) with strong and independent risk management functions have lower enterprise-wide risk. We hand-collect information on the organizational structure of the risk management function at the 74 largest publicly-listed BHCs, and use this information to construct a Risk Management Index (RMI) that measures the strength of organizational risk controls at these institutions. We find that BHCs with a high RMI in the year 2006 (i.e., before the onset of the financial crisis) had lower exposure to private-label mortgage-backed securities, were less active in trading off-balance sheet derivatives, had a smaller fraction of non-performing loans, and had lower downside risk during the crisis years (2007 and 2008). In a panel spanning the 9 year period 2000--2008, we find that BHCs with higher RMIs have lower enterprise-wide risk, after controlling for size, profitability, a variety of risk characteristics, corporate governance, CEO's pay-performance sensitivity, and BHC fixed effects. This result holds even after controlling for any dynamic endogeneity between risk and internal risk controls. Overall, these results suggest that strong internal risk controls are effective in restraining risk-taking behavior at banking institutions.

Trading behaviour, price discovery and volatility in competing market microstructures

The first chapter investigates the price and volatility impacts produced by block trades in an inter-market environment with different microstructures. A sample of European cross-traded securities is employed to investigate whether large trades executed on the foreign market (London Stock Exchange's SEAQ-I market) produce any impacts on the securities' home markets and analyse whether different market microstructures matter. The price impact in the home markets is detected before the large trade is executed on SEAQ-I and proceeds in a protracted fashion, implying that substantial pre- and post-positioning is undertaken by London market makers through the home markets. The new equilibrium price on the home market is reached before the trade information is published on SEAQ-I. Large trades are also found to cause higher price volatility in auction trading systems than in a hybrid market microstructure. The second and third chapters analyse the formation of quoted and effective spreads and their components in three different market microstructures. The results show that quoted and effective spreads generated by a hybrid system (Deutsche Borse's IBIS system) are lower than those generated by both the pure auction system (Paris Bourse's CAC system) and the dealership system (London Stock Exchange SEAQ market). Traders on a hybrid mechanism face the lowest costs and this result holds even when we control for (a) the level of market concentration in liquidity provision, and (b) company-specific news. However, the adverse selection component of the spread is significantly higher in an auction trading system compared to both the dealership and the hybrid trading system. This fifth chapter investigates (a) whether, in a hybrid trading mechanism, voluntary market makers provide a higher level of price stabilisation than limit order traders even if they do not have any obligation to keep orderly markets, (b) the strategic interactions between the limit order book and market makers, and (c) the behaviour of the order flow at times of price uncertainty. We analyse these issues using high frequency data from the London Stock Exchange which has adopted a hybrid market microstructure. We find that prices on the dealership system track the security's true value more efficiently. The dealership system can transact higher volumes with lower price volatility. This evidence suggests that market makers provide price stabilisation, even if they have no binding obligation to do so, thus improving the market's quality. In terms of trading behaviour, we find that in a hybrid trading mechanism, traders are not encouraged to provide liquidity on the order book through limit orders as price uncertainty increases. Instead orders migrate to the dealership system for execution

Transparency, tax pressure and access to finance

In choosing transparency, firms must trade off the benefits from better access to finance against the cost of a greater tax burden. We study this trade-off in a model with distortionary taxes and endogenous rationing of external finance. The evidence from two different data sets, one formed only by listed firms and another mainly by unlisted firms, bears out the model's predictions: First, investment and access to finance are positively correlated with accounting transparency, especially in firms that depend more on external finance, and are negatively correlated with tax pressure. Second, transparency is negatively correlated with tax pressure, particularly in sectors where firms are less dependent on external finance, and is positively correlated with tax enforcement. Finally, financial development enhances the positive effect of transparency on investment, and encourages transparency by financially dependent firms

Mark-to-market accounting and systemic risk: evidence from the insurance industry

One of the most contentious issues raised during the recent crisis has been the potentially exacerbating role played by mark-to-market accounting. Many have proposed the use of historical cost accounting, promoting its ability to avoid the amplification of systemic risk. We caution against focusing on the accounting rule in isolation, and instead emphasize the interaction between accounting and the regulatory framework. First, historical cost accounting, through incentives that arise via interactions with complex capital adequacy regulation, does generate market distortions of its own. Second, while mark-to-market accounting may indeed generate fire sales during a crisis, forward-looking institutions that rationally internalize the probability of fire sales are incentivized to adopt a more prudent investment strategy during normal times which leads to a safer portfolio entering the crisis. Using detailed, position- and transaction-level data from the U.S. insurance industry, we show that (a) market prices do serve as ‘early warning signals’, (b) insurers that employed historical cost accounting engaged in greater degrees of regulatory arbitrage before the crisis and limited loss recognition during the crisis, and (c) insurers facing mark-to-market accounting tend to be more prudent in their portfolio allocations. Our identification relies on the sharp difference in statutory accounting rules between life and P&C companies as well as the heterogeneity in implementation of these rules within each insurance type across U.S. states. Rather than promoting a shift away from market-based information, our results indicate that regulatory simplicity may be preferred to the complexity of risk-weighted capital ratios that gives rise, through interactions with accounting rules, to distorted risk-taking incentives and potential build-up of systemic risk