A theory of the going-public decision

We address the question: At what stage in its life should afirm go public rather than undertake its projects using privateequity financing? In our model a firm may raise external financingeither by placing shares privately with a risk-averse venturecapitalist or by selling shares in an IPO to numerous smallinvestors. The entrepreneur has private information about hisfirm's value, but outsiders can reduce this informational disadvantageby evaluating the firm at a cost. The equilibrium timing ofthe going-public decision is determined by the firm's trade-offbetween minimizing the duplication in information productionby outsiders (unavoidable in the IPO market, but mitigated bya publicly observable share price) and avoiding the risk-premiumdemanded by venture capitalists. Testable implications are developedfor the cross-sectional variations in the age of going-publicacross industries and countries.     

Reputation, renegotiation, and the choice between bank loans and publicly traded debt

We model firms' choice between bank loans and publicly tradeddebt, allowing for debt renegotiation in the event of financialdistress. Entrepreneurs, with private information about theirprobability of financial distress, borrow from banks (multiperiodplayers) or issue bonds to implement projects. If a firm isin financial distress, lenders devote a certain amount of resources(unobservable to entrepreneurs) to evaluate whether to liquidatethe firm or to renegotiate its debt. We demonstrate that banks'desire to acquire a reputation for making the 'right' renegotiationversus liquidation decision provides them an endogenous incentiveto devote a larger amount of resources than bondholders towardsuch evaluations. In equilibrium, bank loans dominate bondsfrom the point of view of minimizing inefficient liquidation,.however, firms with a lower probability of financial distresschoose bonds over bank loans.     

Common law exceptions to employment at will and U.S. labor markets

Employment relationships in the United States were historicallygoverned by the common law doctrine of employment at will. Underthis rule, parties to an employment relationship could, in theabsence of an explicit contract, unilaterally terminate thematch at any time, for any reason, and without penalty. In recentdecades, numerous state courts have recognized 'exceptions'to employment at will that limit the circumstances of workerdismissal. Using a panel of state labor market aggregates from1965 to 1994, this article examines the effect of these exceptionson U.S. labor markets. These exceptions are seen to have noeffect on aggregate employment nor unemployment. However, temporaryemployment is observed to increase by a statistically significant15% following the adoption of an exception. The implied contractexception, in particular, appears to be responsible for thisincrease.     

The rationality of early exercise decisions: evidence from the S&P 100 index options market

This study provides a comprehensive empirical analysis of theearly exercise history of S&P 100 put and call option. Eventhough the S&P 100 index option market is generally consideredto be the most efficient options market in the world, we showthat many exercise decisions are inefficient because they occurwhen recorded bids are greater than exercise values. Due tomarket imperfections, some of the cases of inefficient exerciseare still rational, but we show that a substantial number ofthese decisions are clearly irrational since it would have beenpossible to realize a larger riskless net cash flow by selling.Unlike previous studies of early exercise, our tests of efficiencyand the rational decisions that presumably lead to efficientmarkets are model independent. We also provide evidence concerningthe relative significance of dividends and the wild card toindex option pricing models, and introduce and document theimportance of the option to exercise and avoid the indirectcosts of the spread. We also find evidence of a significantday-of the-week exercise effect, and present some likely explanationsfor that effect.