Urban Economic Openness and IPO Underpricing

This paper represents a first attempt to employ a macroeconomic approach to explain the high and varying IPO underpricing within a single emerging market. We examine the empirical impact of trade openness on the short-run underpricing of initial public offerings (IPOs) using city-level data. Particularly, we argue that urban economic openness (UEO) has a significant impact on the productivity and on prices of both direct and indirect real estate due to productivity gains of companies in more open areas. This in turn positively affects the firm’s profitability, enhancing the confidence in local real estate markets and future company performance, hence decreasing the uncertainty of the IPO valuation. As a result, issuers have less incentive to underprice IPO shares. We use a sample of Chinese real estate IPOs, which offer a suitable laboratory thanks to their strong geographic investment patterns focused locally and a country with a highly heterogeneous openness across regions. Controlling for traditional firm- and issuing-specific characteristics of IPOs that are used for developed markets and Chinese-related features (i.e. listing location and state ownership), we find the evidence that companies investing in economically more open areas experience less IPO underpricing. Our results show great explanatory power and are robust to different specifications.     

The ECB’s fiscal policy

While the ECB helped mitigate the euro crisis in the aftermath of Lehman, it has stretched its monetary mandate and moved into fiscal territory. This text describes and summarizes the crucial role played by the ECB in the intervention spiral resulting from its bid to manage the crisis. It also outlines ongoing competitiveness problems in southern Europe, discusses the so-called austerity policy of the Troika, comments on QE and presents two alternative paths for the future development of Europe.     

Taxation and parental time allocation under different assumptions on altruism

This paper examines the effects of labor income taxation on parental time allocation in an OLG model in which child care arrangements, that is the combination of parental and non-parental time, matter for human capital accumulation. We show that the sign of the impact of labor income taxation on parental time with children and on growth critically depends on the assumption on the altruistic motives behind the choice of devoting time to children.     

Dividend taxes and stock volatility

How do dividend taxes affect stock volatility? If a risk-averse executive faces price risk through his incentive contract, changes in stock volatility due to dividend taxes may increase agency costs and therefore decrease overall welfare. In this paper, I use a decrease in dividend taxes as a natural experiment to identify their effect on the firm’s idiosyncratic stock return volatility. Stock volatility decreased after the tax cut for firms at which executives have larger sensitivity to stock price in their incentive compensation package relative to firms at which executives have a smaller sensitivity. Therefore, with risk-averse executives and risk-neutral shareholders, dividend taxes may exacerbate agency costs. The increase in agency costs will decrease shareholder welfare, which can be partially offset by the use of options in the employment contract.     

Tax penalties on fluctuating incomes: estimates from longitudinal data

Progressive personal income taxes can cause individuals with fluctuating incomes to pay more taxes over time than individuals with constant incomes of the same average value. The implicit tax penalty violates principles of equity and may harm efficiency by discouraging risk-taking activities, such as entrepreneurship. This paper uses longitudinal data to estimate the tax penalties in six panels of Canadian data from 1993 to 2010. The effects of various income averaging policies for mitigating tax penalties are then examined.     

On the optimal lifetime redistribution and social objectives: a multidimensional approach

We characterize optimal redistribution policy when there are differences not only in individuals’ productivities but also in their tastes towards the timing of consumption, i.e. some are patient and others impatient in consumption over the life cycle and this preference together with productivity is non-observable to government. We consider different social objectives and incorporate a novel approach taken in the spirit of Roemer (Equality of opportunity, Harvard University Press, Harvard, 1998) and Van de Gaer (Equality of opportunity and investments in human capital, Katholieke Universiteit Leuven, 1993). This approach applies a compromise between the principle of compensation and the principle of responsibility. We derive analytical expressions which describe the optimal distortion (upward or downward) in saving. As the multidimensional problems become very complicated, to gain a better understanding, we also numerically examine the properties of an optimal lifetime redistribution policy. We find support for a nonlinear tax/pension program in which impatient types are taxed at the margin, and patient low ability types are subsidized in their retirement consumption. Numerical simulations show quite big differences in terms of the levels of marginal tax rates between different social objectives, indicating that the optimal income taxation results are sensitive to the choice of the social planner’s goals.     

Oil shocks,policy uncertainty and earnings surprises

The study utilizes a structural VAR model to understand the connections among oil shocks, policy uncertainty and aggregate earnings in US. We find that the positive innovations in US oil supply increase the aggregate earnings. A rise in the US policy uncertainty decreases the aggregate earnings. After 2007 with the shale oil development in US, the earnings responses to the US oil supply shocks has increased. Over time shocks to US oil supply reduce the policy uncertainty. The development of US oil production is associated with the increase in income and the enhancement on political and economy security in US. Policy uncertainty plays an important role in the transmission of oil shocks to the earnings. The structural oil price shocks explain around 35% of the overall variations in the policy uncertainty in the long run and cause long swings in the policy uncertainty. The direct effects of oil shocks on the aggregate earnings are amplified by the endogenous responses of policy uncertainty.     

The efficiency of IPO issuing mechanisms and market conditions: evidence in China

This study conducts a comparison analysis on the efficiency of bookbuilding and secondary market proportional offering (hereafter, SMP offering) in the China stock market. SMP offering as described in this paper is not a follow-on offering, but an initial offering applicable to investors in the secondary market. Specifically, as a unique type of fixed price offering, SMP offering only allows the existing investors who are holding shares (of any listed firms) in the secondary market to subscribe to IPO shares. The amount of IPO shares available to be subscribed by the existing investors is proportional to market value of shares held by them in the secondary market. We find some interesting evidence showing that, compared with bookbuilding, SMP offering is more efficient for pricing IPOs, particularly, in a volatile market. SMP offering leads to lower underpricing and lower cross-sectional variation of short-run returns of IPOs. Also, SMP offering is better able to counteract adverse market conditions in the form of low market return and/or high market volatility. Our results are robust to various alternative tests, e.g., the Heckman (Econometrica 47:153–161, 1979) two-stage procedure and an out-of-sample test, after controlling for the problem of endogeneity and for the influence of the exchange of listing, respectively.     

Odd lot trading and earnings announcements

This study investigates odd lot trading, both trades and orders, around quarterly earnings announcements to determine whether odd lot traders are informed regarding the information contained in earnings announcements. We find pre-announcement odd lot order imbalances are not positively correlated with post-announcement returns and odd lot traders do not earn excess returns. Portfolios long stocks highly bought by odd lot traders in the pre-announcement period and short stocks highly sold by odd lot traders do not outperform the market. We conclude that odd lot traders are not in possession of earnings announcement information prior to its release to the public.     

Does corporate diversification reduce value in high technology firms?

We find that firm value is reduced via industrial diversification and this reduction in value depends upon a firm’s technology intensity. We consider that asymmetric information problems are more severe in technology intensive industries and find that high tech industry firms present distinctly larger value reduction when compared to low tech industry firms. The negative valuation effect is greater for firms that have a relatively larger amount of intangible assets and greater R&D capital. We determine that our findings are robust to different estimation methods and alternative excess value measures.