Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors

We examine the costs and benefits of the global integrationof initial public offering (IPO) markets associated with thediffusion of U.S. underwriting methods in the 1990s. Bookbuildingis becoming increasingly popular outside the United States andtypically costs twice as much as a fixed-price offer. However,on its own, bookbuilding only leads to lower underpricing whenconducted by U.S. banks and/or targeted at U.S. investors. Formost issuers, the gains associated with lower underpricing outweighedthe additional costs associated with hiring U.S. banks or marketingin the United States. This suggests a quality/price trade-offcontrasting with the findings of Chen and Ritter, particularlysince non-U.S. issuers raising US$20 million–US$80 millionalso typically pay a 7% spread when U.S. banks and investorsare involved.     

IPO Pricing in the Dot-com Bubble

IPO underpricing reached astronomical levels during 1999 and 2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by marked changes in pre-IPO ownership structure and insider selling behavior over the period, which reduced key decision makers' incentives to control underpricing. After controlling for these changes, the difference in underpricing between 1999 and 2000 and the preceding three years is much reduced. Our results suggest that it was firm characteristics that were unique during the "dot-com bubble" and that pricing behavior followed from incentives created by these characteristics.     

Public Sector Employment and the Skill Premium: Sweden versus the United States 1970–2012

Swedish census data and tax records reveal an astonishing decline in the aggregate skill premium of 30 percent between 1970 and 1990, with only a modest recovery in the next couple of decades. In contrast, the US skill premium rose by around 24 percent over those four decades. A theory that equalizes wages with marginal products can rationalize these disparate outcomes when we replace commonly used measures of total labor supplies by private sector employment. The dramatic decline in the skill premium in Sweden is the result of an expanding public sector that has disproportionately hired unskilled labor.     

Understanding European unemployment with matching and search-island models

To understand European and American unemployment during the last 60 years, we use a search-island model and four matching models with workers who have heterogeneous skills and entitlements to government benefits. When there is higher turbulence, in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs, high government mandated unemployment insurance (UI) and employment protection (EP) in Europe increase unemployment rates and durations. But when there is lower turbulence, high European EP suppresses unemployment rates despite high European UI. Four matching models differ in how they assign unemployed workers to matching functions. That affects how strongly unemployment responds to increases in turbulence. Heterogeneity among unemployed workers highlights the central role of adverse labor market externalities in matching models and reveals that the cost of posting vacancies is the lynchpin of a matching model.     

Underpricing and entrepreneurial wealth losses in IPOs: theory and evidence

We model owners as solving a multidimensional problem when takingtheir firms public. Owners can affect the level of underpricingthrough the choices they make in promoting an issue, such aswhich underwriter to hire or on what exchange to list. The benefitsof reducing underpricing in this way depend on the owners' participationin the offering and the magnitude of the dilution they sufferon retained shares. We argue that the extent to which ownerstrade off underpricing and promotion is determined by the minimizationof their wealth losses. Evidence from a sample of U.S. initialpublic offering confirms our empirical predictions.     

Understanding European unemployment with a representative family model

A representative family model with indivisible labor and employment lotteries has no labor market frictions and complete markets. Nevertheless, its aggregate responses to an increase in government supplied unemployment insurance (UI) and to an increase in microeconomic turbulence are qualitatively similar to those in two macromodels with labor market frictions and incomplete markets, namely, the matching and search-island models in Ljungqvist and Sargent [2007a. Understanding European unemployment with matching and search-island models. Journal of Monetary Economics, this issue]. Because there is no frictional unemployment in the representative family model, an increase in employment protection (EP) decreases aggregate work because the representative family substitutes leisure for work, an effect opposite to what occurs in matching and search-island models. Heterogeneity among workers highlights the economy-wide coordination in labor supply and consumption sharing that employment lotteries and complete markets achieve in the representative family model. A high disutility of labor makes generous UI cause very low employment levels.     

The investment behavior of buyout funds: Theory and evidence

We analyze the determinants of buyout funds’ investment decisions. We argue that when there is imperfect competition for private equity funds, the timing of funds’ investment decisions, their risk-taking behavior, and their subsequent returns depend on changes in the demand for private equity, conditions in the credit market, and fund managers’ ability to influence perceptions of their talent. We investigate these hypotheses using a proprietary dataset of 207 U.S. buyout funds that invested in 1,957 buyout targets over a 30-year period. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our findings are as follows. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Finally, following periods of good performance, funds become more conservative, and this effect is stronger for first-time funds.     

Evidence of Information Spillovers in the Production of Investment Banking Services

We provide evidence that firms attempting IPOs condition offer terms and the decision whether to carry through with an offering on the experience of their primary market contemporaries. Moreover, while initial returns and IPO volume are positively correlated in the aggregate, the correlation is negative among contemporaneous offerings subject to a common valuation factor. Our findings are consistent with investment banks implicitly bundling offerings subject to a common valuation factor to achieve more equitable internalization of information production costs and thereby preventing coordination failures in primary equity markets.     

The role of hostile stakes in German corporate governance

This article uses clinical evidence to show how the German system of corporate control and governance is both more active and more hostile than has previously been suggested. It provides a complete breakdown of ownership and takeover defence patterns in German listed companies and finds highly fragmented (but not dispersed) ownership in non-majority controlled firms. We document how the accumulation of hostile stakes can be used to gain control of target companies given these ownership patterns. The article also suggests an important role for banks in helping predators accumulate, and avoid the disclosure of, large stakes.