IPO auctions and private information

IPO auctions, which provide an impartial way of determining IPO pricing and share allocations, offer a natural setting for examining whether institutional investors possess private information, and for measuring how valuable their information is. Analyzing detailed bidding data from Taiwan’s discriminatory (pay-as-bid) auctions, we find that, relative to retail investors, institutional investors tend to bid higher in auctions when IPO shares are more valuable, and that underpricing is larger in auctions with relatively higher institutional bids. These results imply that institutional investors are better informed about IPO value, and that they obtain higher information rents when they bid higher relative to retail investors. We estimate the value of institutional investors’ private information to be worth about 8.68% of return, which is the extra rate of return they command on their informational advantages over retail investors.     

Measuring misleading information in IPO prospectuses

Review of Quantitative Finance and Accounting - Newly public firms may provide misleading information about their business plans in their initial public offering (IPO) prospectuses. Using textual...     

IPO activity and information in secondary market prices

This paper explores the link between IPO underpricing and financial markets. In my model the IPO is a mean for a capital constrained initial investor to exit and thereby to raise funds for a new investment opportunity. This investor is privately informed vis-a-vis outside investors about the profitability of the new opportunity and the quality of the firm to be offered in the IPO. He can then use the offer price and the fraction of shares sold as signals of his private information. The model shows that underpricing is not only linked to firm’s characteristics, i.e. firm value, but to elements external to the firm, i.e. new investment profitability and financial markets characteristics. In particular higher market efficiency reduces the cost of listing. This results in lower underpricing and the listing of more valuable firm. Similarly, a higher lower bound of the new investment’s profitability reduces the information asymmetry and hence reduces underpricing and widens the range of firms listed.     

Moral hazard,adverse selection,and health expenditures: A semiparametric analysis

Theoretical models predict asymmetric information in health insurance markets may generate inefficient outcomes due to adverse selection and moral hazard. However, previous empirical research has found it difficult to disentangle adverse selection from moral hazard in health care consumption. We propose a two‐step semiparametric estimation strategy to identify and estimate a canonical model of asymmetric information in health care markets. With this method, we can estimate a structural model of demand for health care. We illustrate this method using a claims‐level data set with confidential information from a large self‐insured employer. We find significant evidence of moral hazard and adverse selection.     

Strategic trading, asymmetric information and heterogeneous prior beliefs

We develop a multi-period trading model in which traders face both asymmetric information and heterogeneous prior beliefs. Heterogeneity arises because traders agree to disagree on the precision of an informed trader's private signal. In equilibrium, the informed trader smooths out her trading on asymmetric information gradually over time, but concentrates her entire trading on heterogeneous beliefs toward the last few periods. As a result, the model's volume dynamics are consistent with the U-shaped intraday pattern at the close. Furthermore, the model predicts a positive autocorrelation in trading volume, and a positive correlation between trading volume and contemporaneous price volatility.     

Moral hazard in teams with subjective evaluations

This article studies moral hazard in teams where workers' wages depend on two types of performance measures: objective team output and subjective evaluations. The evaluations include both self‐ and peer evaluations. I find that when evaluations become less subjective, workers' wages should be more sensitive not only to their evaluations but also to the team's output. I also show that subjective evaluations should be used in relative terms only when the degree of subjectivity is not too high. The results also associate the introduction of a budget breaker with the level of subjectivity within organizations.     

Moral hazard,hold‐up,and the optimal allocation of control rights

I examine the optimal allocation of control rights in a model with manager moral hazard, where the manager and investor may hold up each other ex post. The control allocation determines both the likelihood of hold‐up and the agents’ renegotiation payoffs. In equilibrium, only two control allocations are optimal: either exclusive investor control or a contingent control allocation that allows the manager to remain in control if, and only if, interim performance is good. Thus, my model explains why it may be optimal to link control to the firm’s performance such that managers retain control only following good performance.     

Leadership based on asymmetric information

Rational players, unconstrained by contracts or formal authority, choose to follow a better‐informed leader, whose action reveals part of her information. If the leader satisfies a credibility condition, then the unique nondegenerate equilibrium solves distinct shirking and coordination problems and achieves the first best. If credibility fails, as is more likely for a large organization, then followers ignore the leader, and equilibria are very inefficient. Appointing multiple leaders, or a high‐cost leader, can restore credibility. If players invest privately in information, then a leader often appears endogenously. The equilibrium concept is an original extension of sequential equilibrium to continuous states.     

Belief updating, debt pricing and financial decisions under asymmetric information

This paper studies debt holders’ belief updating, valuation of corporate debt, and equity owners’ financing decisions during financial distress under asymmetric information. This is done within a continuous-time framework, where the relevant state variable is assumed to follow an Arithmetic Brownian motion (ABM). ABM can take negative values and has very realistic feature compared with Geometric Brownian motion (GBM). Using Chapter 11 of U.S. Bankruptcy Code as a costly screening device, we can characterize which firm will choose private workouts (in the form of strategic debt service) and which will choose to file for the Chapter 11 Bankruptcy procedure (in the form of debt-equity swap) when the firm is in financial distress. Using arguments similar to equilibrium refinements, we give a clear picture of how debt holders’ beliefs about the firm’s types are updated according to the state variable and the firm’s default behavior, and describe optimal strategies of both parties under those beliefs. We also provide an approximate solution to the debt pricing problem under asymmetric information.     

个人保险代理人道德风险与激励机制研究

个人代理人为我国保险业的快速发展作出了极大的贡献,但由于个人经济理性决策,个人代理人会利用自己的信息优势侵害保险人与投保人的利益,从而引发道德风险问题。根据委托一代理理论,激励机制是解决委托人和代理人之间关系的核心问题,对于个人代理人而言,需从保险公司、市场、监管多维角度出发,全面、系统地构建激励机制,有效地防范道德风险。     

Corporate investment and financing under asymmetric information

We develop a dynamic model of corporate investment and financing decisions in which corporate insiders have superior information about the firm's growth prospects. We show that firms with positive private information can credibly signal their type to outside investors using the timing of corporate actions and their debt-equity mix. Using this result, we show that asymmetric information induces firms with good prospects to speed up investment, leading to a significant erosion of the option value of waiting to invest. Additionally, we demonstrate that informational asymmetries may not translate into a financing hierarchy or pecking order over securities. Finally, we generate a rich set of testable implications relating firms’ investment and financing strategies, abnormal announcement returns, and external financing costs to a number of managerial, firm, and industry characteristics.     

Issuer surplus and the partial adjustment of IPO prices to public information

This study develops a model in which rational issuers maximize the expected surplus from going public by choosing an offer price that weighs the benefit of higher proceeds if the offer is completed against the cost of foregone surplus if the offer fails. Increases in the market valuation of comparable firms during the waiting period imply higher surplus associated with going public; issuers respond with a partial revision in the offer price to elevate the probability of completion. The model offers insights into many facts associated with initial public offering pricing, including partial adjustment to market returns, the inverse relation between withdrawal and market returns, the asymmetric price adjustment to up versus down market returns, hot-issue markets, and unconditional underpricing.     

Limit-order submission strategies under asymmetric information

This paper provides evidence that informed traders dominate the response of limit-order submissions to shocks in a pure limit-order market. In the market we study, informed traders are highly sensitive to spreads, volatility, momentum and depth. By contrast, uninformed traders are relatively insensitive to all these market conditions. The dominance of the informed over limit-order submissions is magnified by contrasts between them and the uninformed in the use of aggressively-priced limit orders.     

Conditional event studies,anticipation, and asymmetric information: the case of seasoned equity issues and pre-issue information releases

Information disclosed before equity issue announcements could reduce the price drops at the announcements by (1) reducing uncertainty about managers' private information, and/or (2) helping investors to anticipate the equity issues. To distinguish between these effects, we examine the determinants of firms' decisions to issue equity, and develop a conditional event-study procedure, based on Acharya [Acharya, S., 1988, A generalized econometric model and tests of a signaling hypothesis with two discrete signals, Journal of Finance, 43, 413–429.], that distinguishes between anticipation and asymmetric information. After controlling for differences in uncertainty across firms, we present evidence that stock split declarations, dividend announcements and earnings releases help investors to anticipate equity issues, but do not reduce asymmetric information.     

Earnings management and firm valuation under asymmetric information

This paper seeks to provide an explanation for why corporate officers manage the disclosure of accounting information. We show that earnings management affects firm value when value-maximizing managers and investors are asymmetrically informed. In equilibrium, the strategic management of reported earnings influences investors' assessments of the market values of companies' shares.     

Financial equilibrium with asymmetric information and random horizon

We study in detail and explicitly solve the version of Kyle’s model introduced in a specific case in Back and Baruch (Econometrica 72:433–465, 2004), where the trading horizon is given by an exponentially distributed random time. The first part of the paper is devoted to the analysis of time-homogeneous equilibria using tools from the theory of one-dimensional diffusions. It turns out that such an equilibrium is only possible if the final payoff is Bernoulli distributed as in Back and Baruch (Econometrica 72:433–465, 2004). We show in the second part that the signal the market makers use in the general case is a time-changed version of the one they would have used had the final payoff had a Bernoulli distribution. In both cases, we characterise explicitly the equilibrium price process and the optimal strategy of the informed trader. In contrast to the original Kyle model, it is found that the reciprocal of the market’s depth, i.e., Kyle’s lambda, is a uniformly integrable supermartingale. While Kyle’s lambda is a potential, i.e., converges to 0, for the Bernoulli-distributed final payoff, its limit in general is different from 0.     

Convertible calls and corporate taxes under asymmetric information

This paper develops a signalling model of call of convertible securities (bonds or preferred stock) in the presence of corporate taxes and asymmetric information about future earnings. In equilibrium, managers with relatively unfavorable information call to force convertible holders to convert to common stock (in spite of the loss of corporate tax benefits if the convertibles are bonds), while those with relatively favorable information do not call. The model predicts that the announcement period common stock returns are more negative at the call of convertible bond than at the call of convertible preferred stock. Furthermore, we predict that when the importance of the tax deductibility of interest differs among firms, so does the stock price reaction to the announcement of convertible debt call. Specifically, the loss of equity value at the announcement decreases with the amount of non-debt tax shield that the calling firm owns, decreases with the book value of convertible debt called, and increases with corporate taxes.     

Bank competition and financing efficiency under asymmetric information

We consider a setting in which an entrepreneur seeks bank financing, and the project type is her private information. Different from existing theories featuring information asymmetry, and consistent with empirical findings, our model predicts: greater bank competition leads to increased bank lending as interest rates fall, leading to lower quality loans. The relationship between market power and financing efficiency is hill-shaped. An intermediate level of market power is desirable, as it can mitigate inefficiencies arising due to cross-subsidization among borrowers in a pooling equilibrium. Interest rate controls may achieve efficiency, but the specific policy depends on the bank market structure.     

IPO underpricing,signaling, and property returns

This paper investigates whether IPO signals reveal proprietary information about the prospects of an issuing firm’s underlying industry. By analyzing a sample of European property company (EPC) IPOs from 1997 to 2007, we take advantage of a heterogeneous set of industry performance measures, i.e., yields and total returns of direct property investments in various European property markets that can be clearly assigned to each individual IPO. The results reveal that the main signal of interest, underpricing, is in fact positively related to average property yields for a 12-month post-IPO period; a result that supports our assumption. Other signals, as proposed in previous research, do not appear to contain any information about the prospects of the IPO firm’s target property investment market. We also show that total returns seem to be a biased measure for direct property performance. Further tests for the signaling model’s preconditioned presence of information asymmetry among EPCs reveal that underpricing levels are a function of company-specific ex ante uncertainty proxies. In contrast, property-specific ex ante uncertainty proxies do not explain underpricing levels.