Firm Value and the Choice of Offering Method in Initial Public Offerings

A firm raising capital in an initial public offering faces the problems of choosing between a firm-commitment and a best-efforts offering and of how to convey information about its value to potential investors. The offering method chosen affects both the firm's cost of obtaining capital and investors' perceptions about firm value. A partially pooling, partially separating equilibrium is found where high-valued firms have information about their values revealed in a firm-commitment offering, while low-valued firms use best-efforts offerings and are unable to distinguish themselves from other firms.     

Distortions in Real Estate Transactions with Out-of-State Participants

Using the MLS and the land registration data from Indiana, this paper identifies and explains price distortions associated with out-of-state sellers and buyers in the housing market. We find that out-of-state buyers pay 20.4% higher prices than local buyers, and the premium is fully explained by the former purchasing larger homes than the latter. On the other hand, out-of-state sellers receive a 21.2% price discount, among which 9.3% is attributable to differences in transactional characteristics, 3.2% is explained by increased motivation and weak bargaining power of out-of-state sellers, and 1.5% is due to differences in agent characteristics and behaviours. The remaining 7.2% discount varies systematically with the informational disadvantage of out-of-state sellers, and with the market condition. Our results are robust to model misspecification.     

Managerial Incentives in a Stock Market Economy

This study presents an analysis of the managerial incentive problem in a stock market economy in which incentive contracts are structured in terms of security ownership. In our model, the manager's ownership share signals effort and is determined endogenously as the solution to a special portfolio decision problem. Managerial investment in the firm is evaluated under various security pricing arrangements. Our analysis indicates that, in general, stockholders should sell shares to a manager at a discount to ensure a Pareto efficient ownership (incentive) structure. However, efficient pricing (discount) schedules generally are nonlinear and, in many respects, isomorphic to discriminating price functions which have been considered in neoclassical models of monopoly.     

Seller Over-Pricing and Listing Contract Length: The Effects of Endogenous Listing Contracts on Housing Markets

This paper examines how seller pricing decisions influence listing contract length and how these decisions affect price and liquidity in housing markets. Because list price affects broker effort required to sell the property, brokers respond to seller overpricing by increasing the negotiated listing contract length. At the same time, sellers respond to longer listing contracts by adjusting their list price strategy. Both list price and length of marketing time affect broker sales effort and therefore a property’s realized selling price and liquidity. Analysis of house transaction data from Virginia indicates that greater over-pricing by sellers prompts brokers to pursue longer listing contracts, which subsequently lengthen marketing time but increase selling price. The results reveal a novel transmission mechanism from higher list price (which induces longer contracts) to selling price and liquidity.     

Stock price effects and costs of secondary distributions

This study does not support the view that a large number of shares can be sold at the prevailing market price and at a small cost. A significant stock price decrease is observed at the initial announcement of secondary distributions. The price declines are greater for offerings by officers and directors and for larger offerings, but are significant for all types of sellers and for large and small offerings. There is no significant price decline at the offering when secondaries are announced in advance. Underwriting and other selling costs are substantial and are positively related to relative offering size.     

Liquidity and price pressure in the corporate bond market: evidence from mega-bonds

Larger bonds offer greater liquidity, which should reduce their yields. A simple way for firms to reduce financing costs is to sell bonds with large face values. We find that mega-bonds are more liquid than smaller bonds. However, offering yield spreads on mega-bonds are not lower and are higher than spreads of bonds issued by similar companies. The discount applied to large new issues is consistent with price pressure effects that are also present in the secondary market prices of the issuing firm's existing bonds. Our results suggest a hidden cost to issuing very liquid bonds.     

Demand–supply imbalances in the credit default swap market: empirical evidence

This paper empirically examines demand–supply imbalances in the credit default swap (CDS) market and provides evidence of its effect on the CDS spread dynamics. Analysis is conducted on a large and homogenous data set of the 92 non-financial European companies with the most quoted Euro-denominated CDS contracts during the 2002–2008 period. Main findings indicate that short-term CDS price movements, not related to fundamentals, are positively affected by demand–supply imbalances when protection buyers outstrip protection sellers. Results illustrate that CDS spreads reflect not only the price of credit protection, but also a liquidity premium for the anticipated cost of unwinding the position of protection sellers, especially during stress periods.     

Information Content of Offer Date Revelations: A Fresh Look at Seasoned Equity Offerings

Besides the offer price discount, investment bankers use revisions in offer size from the amount originally filed to signal the issuer's quality to their buy‐side clients. Unlike the offer price discount, offer size revision not only relates to the offer date price reaction, it also predicts post‐SEO (seasoned equity offering) performance. Improved SEOs, whose offer size exceeds the amount originally registered, experience significantly positive returns during the registration period and on the offer date. More importantly, they do not underperform post‐issuance. Their complement, regular SEOs, exhibit significantly negative returns during the registration period, on the offer date, and underperform their benchmark following issuance.     

Price Elasticity of Demand and an Optimal Cash Discount Rate in Credit Policy

While the provision of a cash discount is equivalent to a reduction in price, the role of price elasticity of demand in determining credit terms has been neglected in the extant literature. In this paper, this role is investigated and it is shown that the optimal cash discount rate is affected by the price elasticity of demand for the firm's product. The comparative effects on the optimal cash discount rate with respect to exogenous changes in the fraction of credit sales paid after taking cash discount, the cost of short-term funds and the bad debt loss ratio are investigated. A trade-off between the time value gain and the price elasticity of demand is established. We find that firms which sell in locations having different price elasticities for their products, and/or which face various costs of short-term funds in different locations, should vary their cash discount terms accordingly.     

Spot price modeling and the valuation of electricity forward contracts: The role of demand and capacity

We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premium.     

Single-family housing transactions: Seller motivations, price, and marketing time

Factors such as relocation and financial distress motivate the seller of a single-family home to facilitate sale by posting a lower list price, communicating the motivations to the marketplace, or offering sales incentives to agents. Impacts of seller motivations on selling prices and marketing times are estimated using data for single-family homes sold in Arlington, Texas, from 1991 to 1993. Results show selling price discounts for houses with sellers who are either eager, motivated, or anxious, houses with sellers who have relocated, foreclosures, and vacant houses. Only foreclosure houses show the reduced marketing time expected for properties with motivated sellers. The results further suggest that the list price is the seller's primary mechanism for selling the property. Reducing the list price fosters faster sales at the sacrifice of the selling price.     

Developing Equity Release Markets: Risk Analysis for Reverse Mortgages and Home Reversions

Equity release products are sorely needed in an aging population with high levels of home ownership. There has been a growing literature analyzing risk components and capital adequacy of reverse mortgages in recent years. However, little research has been done on the risk analysis of other equity release products, such as home reversion contracts. This is partly due to the dominance of reverse mortgage products in equity release markets worldwide. In this article we compare cash flows and risk profiles from the provider's perspective for reverse mortgage and home reversion contracts. An at-home/in long-term care split termination model is employed to calculate termination rates, and a vector autoregressive (VAR) model is used to depict the joint dynamics of economic variables including interest rates, house prices, and rental yields. We derive stochastic discount factors from the no arbitrage condition and price the no negative equity guarantee in reverse mortgages and the lease for life agreement in the home reversion plan accordingly. We compare expected payoffs and assess riskiness of these two equity release products via commonly used risk measures: Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR).     

A Likelihood Ratio Test of Price Volatilities: Comparing Stock Index Spot and Futures

This paper uses three methods to estimate the price volatility of two stock market indexes and their corresponding futures contracts. The classic variance measure of volatility is supplemented with two newer measures, derived from the Garman-Klass and Ball-Torous estimators. A likelihood ratio test is used to compare the classic variance measure of price volatilities of two stock market indexes and their corresponding futures contracts during the bull market of the 1980s. The stock market volatilities of the Standard & Poor's 500 (S&P 500) and New York Stock Exchange (NYSE) indexes were found to be significantly lower than their respective futures price volatilities. Since information may flow faster in the futures markets than in the corresponding stock market, our results support Ross's information-volatility hypothesis. It was also noted that the NYSE spot volatility was lower than the S&P 500 spot volatility. If the rate of information flow and firm size are positively related, then the lower NYSE spot volatility is explained by the size effect. The futures price volatilities for the two indexes were insignificantly different from each other. With stock index spot-futures price correlations approaching unity, one implication of our results for index futures activity is that smaller positions in futures contracts may suffice to achieve hedging or arbitrage goals.     

Sample Selection Approaches to Estimating House Price Cash Differentials

We extend the literature on house price cash differentials in important ways. First, our paper is the first to employ methods to correct for sample selection bias, using both switching regression and propensity score matching of cash vs. non-cash transactions. We use selection models to produce price counterfactuals for cash and noncash buyers. We also include both average treatment effect and a propensity score weighted selection models. From the selection models, we find that previous studies likely overstate the cash discount. Results from counterfactual tests examining cash discounts suggest amplified cash discounts in areas with close proximity to an environmental hazard; and also a pricing differential based on CBG level income, with purchasers in high income areas more likely to pay a cash premium compared to market participants in areas with comparably lower income, where a cash discount is detected. These results provide useful insights for market participants including real estate appraisers, brokers, and buyers and sellers of real estate.     

The Economics of IPO Stabilisation,Syndicates and Naked Shorts

Stabilisation is the bidding for and purchase of securities by an underwriter immediately after an offering for the purpose of preventing or retarding a fall in price. Stabilisation is price manipulation, but regulators allow it within strict limits – notably that stabilisation may not occur above the offer price. For legislators and market authorities, a false market is a price worth paying for an orderly market. This paper compares the rationale for regulators' allowing IPO stabilisation with its effects. It finds that stabilisation does have the intended effects, but that underwriters also seem to have other motives to stabilise, including favouring certain aftermarket sellers and enhancing their own reputation and profits. A puzzling aspect of stabilisation is why underwriters create ‘naked short’ positions which are loss‐making to cover when, as is usual, the aftermarket price rises to a premium. We set up a model to show that the lead underwriter may profit from a naked short at the expense of the rest of the syndicate given the way commissions are apportioned between them. We argue that a naked short mitigates the misalignment of interests which stabilisation causes between issuer and lead underwriter, although it does so at the expense of the non‐lead underwriters.     

Prospect theory and the effectiveness of price limits

Assuming that traders are risk-neutral, Brennan (1986) shows that price limits are effective in improving the efficiency of futures contracts with limited accessibility to information because they obscure the exact loss when they are triggered. However, Brennan's (1986) model fails to explain why price limits also exist in contracts with abundant information like those of financial futures. We show that when traders are loss-averse, the effectiveness of price limits is strengthened even in the presence of precise information. Thus, our analysis provides a theoretical foundation explaining why price limits can be useful when market participants are not fully rational.     

List Price Information in the Negotiation of Commercial Real Estate Transactions: Is Silence Golden?

We examine the use (and non-use) of list price information in the process of marketing commercial real estate. While housing market research suggests that list prices can serve as a strong anchor and/or signal, list price information is included in less than one-third of the commercial property sales and is less likely to be included as part of the sellers’ offering information for larger and more complex properties. Given the potentially powerful effect of list prices (first offers) on outcomes, the non-use of list price information is a puzzle. We speculate that the limited use of list prices may be due to the sellers’ interests in both maintaining their informational advantage and not truncating higher than expected offers, especially during periods of economic growth or with more complex properties. Using a two-stage selection correction model, we find that office properties which provide list price information are, on average, associated with lower price outcomes (ceteris paribus) and that these outcomes vary by price cohort and economic condition. It is important to note, however, that while these findings identify a correlation, they do not necessarily imply causation. Our results support the notion that asymmetric information and information signaling play a dominant role in explaining the sellers’ strategic non-use of list price information in the commercial real estate market and that the signaling effect is more pronounced in higher priced properties and during periods of strong economic growth.     

Does IPO Pricing Reflect Public Information? New Insights from Equity Carve‐Outs

We examine the efficiency of initial public offering (IPO) pricing using a sample of over 300 equity carve‐outs from 1985 to 2009. The partial adjustment theory posits that the initial return of IPOs is predictable based on private information, but public information is fully incorporated. Prospect theory is consistent with both private and public information not being fully incorporated in the offer price. Our analysis confirms that both price update and initial return of carve‐out IPOs can be predicted based on the parent firm's returns during the prepricing and preissuing periods. Further, postissue ownership of the parent firm is associated with significantly higher price update and initial return, while IPOs where the majority of the proceeds are paid out register lower initial return. The size of the subsidiary and relative size of the offering are also significantly related to price update and initial return. These findings are consistent with prospect theory.     

Market power,price discrimination,and allocative efficiency in intermediate‐goods markets

We consider a monopolistic supplier's optimal choice of two‐part tariff contracts when downstream firms are asymmetric. We find that the optimal discriminatory contracts amplify differences in downstream firms' competitiveness. Firms that are larger—either because they are more efficient or because they sell a superior product—obtain a lower wholesale price than their rivals. This increases allocative efficiency by favoring the more productive firms. In contrast, we show that a ban on price discrimination reduces allocative efficiency and can lead to higher wholesale prices for all firms. As a result, consumer surplus, industry profits, and welfare are lower.     

Conflicts of interest,information provision,and competition in the financial services industry

In some markets sellers have better information than buyers over which products best serve a buyer's needs. Depending on the market structure, this may lead to conflicts of interest in the provision of information by sellers. This paper studies this issue in the market for financial services. The analysis presents a new model of competition between banks, where price competition influences the ensuing incentives for truthful information revelation. We also compare conflicts of interest in two different firm structures, specialized banking and one-stop banking.