OVER-THE-COUNTER FIRMS,ASYMMETRIC INFORMATION,AND FINANCING PREFERENCES

A puzzling empirical finding is that firms often seem to follow a pecking-order hierarchy of financing. Asymmetric information has been hypothesized as one possible explanation for the pecking-order hierarchy. A survey of Fortune 500 firms found strong support for the pecking-order model. This study surveys over-the-counter firms which seem more likely to experience asymmetric information than the Fortune 500. The findings of this study provide empirical support for the asymmetric information hypothesis by demonstrating that managers of firms with greater asymmetric information are more likely to believe their stock is mispriced leading them to follow the pecking-order model of financing.     

An Empirical Analysis of the Effects of Increasing Deductibles on Moral Hazard

Using information on timing and number of claims in a unique data set pertaining to comprehensive automobile insurance with the increasing deductible provision in Taiwan, the authors provide new evidence for moral hazard. Time-varying correlations between the choice of the insurance coverage and claim occurrence are significantly positive and exhibit a smirk pattern across policy months. This empirical finding supports the existence of asymmetric information. A subsample estimation depicts insured drivers' significant responses to increasing deductibles, which implies the existence of moral hazard. According to the probit regression results, the increasing deductible makes policyholders who have ever filed claims less likely to file additional claims later in the policy year. The empirical findings strongly support the notion that the increasing deductible provision helps control moral hazard.     

The Choice and Role of Lockups in IPOs: Evidence from Heterogeneous Lockup Agreements

This paper analyses heterogeneous lockup agreements from the London Stock Market. With hand‐collected data, I compare and contrast absolute‐date lockups with the relative‐date lockups and single lockups versus staggered lockups. This paper tests several potential explanations for the choice of lockup contracts: (i) information asymmetry, (ii) signaling, (iii) agency problem, and (iv) certification. I find strong evidence for information asymmetry and certification (VC and prestigious underwriters) and partial support for agency explanation for the choice of lockups. The insider selling activity and lockup expiration returns are also consistent with asymmetric information, certification and agency hypothesis.     

The Role of Lockups in Initial Public Offerings

In a sample of 2,794 initial public offerings (IPOs), we testthree potential explanations for the existence of IPO lockups:lockups serve as (i) a signal of firm quality, (ii) a commitmentdevice to alleviate moral hazard problems, or (iii) a mechanismfor underwriters to extract additional compensation from theissuing firm. Our results support the commitment hypothesis.Insiders of firms that are associated with greater potentialfor moral hazard lockup their shares for a longer period oftime. Insiders of firms that have experienced larger excessreturns, are backed by venture capitalists, or go public withhigh-quality underwriters are more likely to be released fromthe lockup restrictions.     

Heterogeneous Beliefs,IPO Valuation,and the Economic Role of the Underwriter in IPOs

We empirically analyze the economic role of the underwriter in initial public offerings (IPOs), distinguishing between the “certification” and “market power” hypotheses. We find that equity in high‐reputation underwriter backed IPOs is priced higher and further away from intrinsic value than that in low‐reputation underwriter backed IPOs. Our results are robust to controlling for the endogenous selection of firms to take public by underwriters. Overall, our results support the market power hypothesis and reject the certification hypothesis, indicating that the role of underwriters is to obtain the highest possible valuation for the IPOs that they back rather than to price the equity close to intrinsic value.     

Contracting under asymmetric information: Evidence from lockup agreements in seasoned equity offerings

We document the frequent use of lockup agreements in seasoned equity offerings (SEOs) and examine the determinants of their use, duration, and early release. We find that the likelihood of an SEO lockup and its duration are positively related to issuer information asymmetry measures. Lockup duration is negatively related to underwriter spreads and underpricing, indicating that lockups lower expected flotation costs. Lockups are frequently released early following share prices rises. We conclude that lockups represent a contracting solution to asymmetric information and agency problems that plague equity issues by helping to insure SEO quality and deter opportunistic insider trading.     

Underwriter Quality and Long‐Run IPO Performance

We analyze the relationship between the quality of underwriters and the long‐run performance of initial public offerings (IPOs) in light of underwriter marketing, certification and screening, and information production. We find that higher underwriter quality (measured by the number of managing underwriters, underwriter reputation, and absolute price adjustment) predicts better long‐run performance, even when returns are value weighted. We compare underwriter quality measures and find that the effects of the number of managing underwriters and underwriter reputation are mutually complementary and are especially strong among IPOs with high uncertainty, while absolute price adjustment, which is more likely to be associated with information production than marketing or certification/screening, loses significance. Our findings are consistent with the marketing and certification and screening roles of investment banks but lend little support for the information production role of underwriters.     

THE UNDERPRICING OF “SECOND” INITIAL PUBLIC OFFERINGS

The underpricing of initial public offerings (IPOs) of equity represents a well-documented empirical phenomenon. One prominent explanation for this underpricing relies on the uncertainty investors feel about the value of the issuer. In this paper, this asymmetric information hypothesis is tested by examining the underpricing of IPOs of seventy-four firms for which the uncertainty about the value of the firm is likely to be substantially reduced. These firms were once publicly owned, then taken private, and subsequently returned to public ownership. Findings show that the IPOs of these “reverse leveraged buyouts” are significantly less underpriced than typical IPOs. These results support the asymmetric information hypothesis.     

Firm Transparency and the Costs of Going Public

We demonstrate that firms that are more transparent pay less, in all components of issuance costs, to go public. We employ a sample of 334 previous leveraged buyouts and a characteristic-matched control sample to test the hypothesis that greater firm transparency before the issue decreases the flotation costs of the initial public offering. These flotation costs are divided into initial underpricing, underwriter discount, administrative expenses, and the overallotment option required to take the firm public. Our results provide further evidence of the asymmetric information hypothesis as it applies to initial public offerings.     

Technical Analysis,Investment Psychology,and Liquidity Provision: Evidence from the Taiwan Stock Market

We set out to empirically identify the effects on technical signals attributable to psychological biases, adopting a set of specific liquidity provision proxies for a sample of firms listed on the Taiwan Stock Exchange. The main findings of our empirical analysis are that the "disposition," "information cascade," and "anchoring" effects each have significant impacts on trading signals. Our results should help to shed further light on the asymmetric market responses to technical buy and sell signals, while also providing some potential clarification of the different attitudes of traders toward big-cap and small-cap firms.     

IS THERE A SIGNALING EFFECT OF UNDERWRITER REPUTATION?

In this article we examine the effect of underwriter reputation on the abnormal return due to an announcement to issue seasoned new equity. After controlling for other factors that relate asymmetric information to abnormal returns, underwriter reputation still significantly reduces the magnitude of the negative announcement effect. We also develop a procedure to extract a signaling component from the measure of underwriter reputation. We show that the signaling component of underwriter reputation positively and significantly affects abnormal returns. This result supports the notion that issuing firms use underwriter reputation as an effective instrument to signal that their stocks are not overvalued. JEL classification: D82, G24, G30     

Explaining the diversity in shareholder lockup agreements

This paper investigates whether shareholder lockup agreements in France and Germany mitigate problems of agency and asymmetric information. Despite minimum requirements in terms of the length and percentage of shares locked up, lockup agreements are not only highly diverse across firms but also across the different shareholders of a single firm as most firms have different agreements in place for executives, non-executives and venture capitalists. The diversity across firms and types of shareholders can be explained by firm characteristics—such as the level of uncertainty—as well as the type and importance of each shareholder within the firm.     

Underwriter reputation and the quality of certification: Evidence from high-yield bonds

This paper provides primary evidence of whether certification via reputable underwriters is beneficial to investors in the corporate bond market. We focus on the high-yield bond market in which certification of issuer quality is most valuable to investors owing to low liquidity and issuing firms’ high opacity and default risk. We find bonds underwritten by the most reputable underwriters to be associated with significantly higher downgrade and default risk. Investors seem to be aware of this relation, as we further find the private information conveyed via the issuer-reputable underwriter match to have a significantly positive effect on at-issue yield spreads. Our results are consistent with the market-power hypothesis, and contradict the traditional certification hypothesis and underlying reputation mechanism.     

What Drives the Issuance of Putable Convertibles: Risk-Shifting,Asymmetric Information,or Taxes?

This paper presents the first empirical analysis of firms’ rationale for issuing putable convertible bonds in the literature. We distinguish between three possible rationales for the issuance of putable convertibles: 1) the risk-shifting hypothesis, 2) the asymmetric information hypothesis, and 3) the tax savings hypothesis. The results of our empirical analysis can be summarized as follows. First, putable convertible issuers are larger, less risky firms, having larger cash flows, smaller growth opportunities, and lower bankruptcy probabilities as compared to ordinary convertible issuers. Second, putable convertible issuers have lower preissue market valuations, more favorable announcement effects, and better postissue operating performance when compared to ordinary convertible issuers. Third, putable convertible issuers have better postissue long-run stock return performance as compared to ordinary convertible issuers. Finally, putable convertible issuers typically have greater tax obligations and better credit ratings than ordinary convertible issuers. Overall, the results of our univariate as well as multivariate analyses provide support for the asymmetric information and tax savings hypotheses, but little support for the risk-shifting hypothesis.     

DIFFERENTIAL INFORMATION AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS: AUSTRALIAN EVIDENCE

This paper provides evidence on underpricing in Australia using 340 industrial initial public offerings over the period 1980 to 1990. It aims to explain why underpricing is consistent with rational behaviour by focusing on differential information across IPO firms. We measure differential information along two dimensions, the quality and the quantity of information. We propose that the quality of information is reflected in the reputation of independent advisers to the preparation of the issuing firm's prospectus. Three such independent external advisers are examined: the investigating accountant, the underwriter, and the expert. The results provide strong support for the reputation effect of the underwriter on underpricing. Although there is evidence showing a negative relation between underpricing and the reputation of the investigating accountant and the expert, it is not significant. Our results also support the differential quantity of information hypothesis. Firms with more information available are, on average, less underpriced.     

Lockup and Voluntary Earnings Forecast Disclosure in IPOs

We examine the relation between lockup length and voluntary earnings forecast disclosures for IPOs in Singapore. Unlike firms in the United States, companies in Singapore are allowed to provide earnings forecasts in their IPO prospectuses. We find that forecasters are more likely to accept longer lockup periods, so that the lockup expires after the first post-IPO earnings announcement. Our study also shows that because the lockup agreement removes personal incentives to issue aggressive forecasts, IPO firms tend to issue conservative forecasts. Overall, our results suggest that the lockup mechanism adds credibility to the earnings forecast given in the IPO prospectus.     

The Underwriter Persistence Phenomenon

This study presents new evidence that initial IPO returns have persistent underwriter‐specific components. These components cannot be explained by existing measures of underwriter quality, underwriter service, or controls for several known predictors of initial IPO returns. Tests that trace the roots of persistence most broadly support theories of asymmetric information among underwriters. I present such a model, and consistent with its predictions, I find that high underpricing underwriters (1) are responsible for a majority of the partial adjustment phenomenon, (2) make more informed analyst revisions, (3) experience superior market share growth, and (4) are more likely to serve an institutional clientele.     

An Analysis of Lockups in REIT IPOs

We analyze how the unique characteristics of real estate investment trusts (REITs) affect IPO lockup agreements from 1980 to 2006. The findings show that, unlike industrial IPOs, lockup periods for REIT IPOs do not cluster at 180 days, tend to cover longer periods, and vary over time. Our results support the commitment device hypothesis instead of the signaling hypothesis. That is, REIT managers tend to use lockup agreements to alleviate moral hazard problems and protect post-IPO investors rather than to send signals to investors. Finally, contrary to previous studies, we find no significant negative abnormal returns around the unlock date for the whole sample. The lack of aggressive sales by insiders and the fact that REITs are not backed by venture capitalists can explain our finding.     

The Impact of Firm Location on Equity Issuance

In this paper, I use location as a proxy for the ability of a firm to issue equity. Numerous studies indicate that investors are better able to obtain information on nearby companies. I posit that costs in generating information will be higher for rural firms with few investors in their proximity, than for urban firms with many nearby investors. As predicted, I find that rural firms are less likely to conduct seasoned equity offerings than firms located in urban areas. Furthermore, I find that when a rural firm issues equity, it uses a lower-quality underwriter than otherwise similar urban firms.     

The Maturity Structure of Corporate Debt

We provide an empirical examination of the determinants of corporate debt maturity. Our evidence offers strong support for the contracting-cost hypothesis. Firms that have few growth options, are large, or are regulated have more long-term debt in their capital structure. We find little evidence that firms use the maturity structure of their debt to signal information to the market. The evidence is consistent, however, with the hypothesis that firms with larger information asymmetries issue more short-term debt. We find no evidence that taxes affect debt maturity.