We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena.

This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three month period after an IPO. We find that the lead underwriter is always the dominant market maker, he takes substantial inventory positions in the aftermarket trading, and co-managers play a negligible role in aftermarket trading. The lead underwriter engages in stabilization activity for less successful IPOs, and uses the overallotment option to reduce his inventory risk. Compensation to the underwriter arises primarily from fees, but aftermarket trading does generate positive profits, which are positively related to the degree of underpricing.

Many firms deploy takeover defenses at the time of their IPOs, although at significantly lower rates than for seasoned corporations. We find that IPO managers deploy takeover defenses particularly when their compensation is high, shareholdings are small, and the oversight from non-managerial shareholders is weak. We also find that the presence of a takeover defense in IPO firms is negatively related to acquisition likelihood, yet has no impact on takeover premiums for those firms that are acquired. Together, these results suggest that shareholders ’ marginal costs of takeover defenses exceed the benefits. Takeover Defenses at IPO Firms 1.

: This paper implements a model for the valuation of the default risk implicit in the prices of corporate bonds. The analytical approach considers the two essential ingredients in the valuation of corporate bonds: interest rate uncertainty and default risk. The former is modeled as a diffusion process. The latter is modeled as a spread following a diffusion process, with the magnitude of this spread impacting on the probability of a Poisson process governing the arrival of the default event. We apply two variants of this model to the valuation of fixed-for-floating swaps. In the first, the swap is default-free, and the spread represents the appropriate discounted expected value of the instantaneous TED spread; in the second, we allow the swap to incorporate default risk. We propose to test our models using the entire term structure of corporate bonds prices for different ratings and industry categories, as well as the term structure of fixed-for-floating swaps. The Marketing of Close...

How do firms that go public decide whether to list on a major stock exchange or locally? Using a unique data set on Israeli IPO’s in the US and Tel Aviv, we show that companies that list in the US are young and overwhelmingly high-tech oriented. We argue that high-quality innovative firms are willing to incur additional costs associated with listing in the US in order to reveal their value and distinguish themselves from firms that issue stock back home. Costs of listing in the US include first day underpricing and relinquishing corporate control.

We examine the relation between litigation risk and IPO underpricing. To adjust for the endogeneity bias in previous studies, we use a simultaneous equation framework. Evidence suggests that firms employ underpricing as a form of insurance against future litigation costs. Specifically, firms with greater litigation risk underprice their IPOs by a greater amount. Further, consistent with underpricing representing a viable form of insurance, results indicate that higher underpricing significantly lowers litigation risk

The literature on IPOs offers a wide variety of explanations to justify the dramatic swings in the volume of IPOs observed in the market. Many theories predict that hot IPO markets are characterized by clusters of firms in particular industries for which a technological innovation has occurred, suggesting that hot and cold market IPO firms will differ in quality, prospects, or types of business. We compare firms that go public in the two types of markets from 1982-93, examining them at the time of the IPO and in the following five years. We find that both hot and cold market IPOs are largely concentrated in the same narrow set of high-tech industries. We also find few distinctions in quality or long-term earnings potential. Our results are not consistent with the going public models that imply cold market IPOs are firms with few product innovations and lower growth prospects. Jean Helwege Department of Finance Ohio State University 812 Fisher Hall 2100 Neil Avenue Columbus, OH 43210 (614) 292-3217 (614) 292-2418 FAX helwege_1@cob.osu.edu Nellie Liang Board of Governors of the Federal Reserve System Division of Research and Statistics Capital Markets Section Mail Stop 89 Washington, DC 20551 (202) 452-2918 (202) 452-3819 FAX nliang@frb.gov For example, Ritter (1984) shows that most of the underpricing in the hot issue market of 1980-1981 is attributable to underpricing among IPOs in the natural resources sector. Also, see Lowry and Schwert (2000) on the relationship between underpricing and volume in hot and cold markets, as well as James and Krieshnick (1997).

Debt initial public offerings ~IPOs! represent a major shift in a firm’s financing policy by both extending debt maturity and altering the public-private debt mix. In contrast to findings for seasoned debt offerings, we document a significantly negative stock price response to debt IPO announcements. This result is consistent with debt maturity and debt ownership structure theories. The equity wealth effect is negatively related to the offer’s maturity, and positively related to the degree of bank monitoring. We find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response. The decision to access the public debt market for the first time represents a major change in a firm’s financing policy. An initial public debt offer alters the firm’s debt structure in two significant ways. Not only does this policy choice affect the firm’s debt ownership structure, by altering its mix of public relative to private debt, but it also extends the average debt maturity of the firm substantially. This study provides empirical evidence on the validity of some important debt structure theories by focusing on the information content of initial public debt offers ~debt IPOs!. Two major strands of theories have evolved in the literature. The debt ownership choice theories model corporate choice of private and public debt mix ~see, e.g., Fama ~1985!, Diamond ~1991a!, and Rajan ~1992!!, while the other set of theories models corporate debt maturity choice ~Easterbrook ~1984!, Flannery ~1986!, and Kale and Noe ~1990!!. A number of recent studies empirically test some of the predictions of these models ~Barclay and

This paper examines the potential for external conflicts in large, diversified business groups. On one hand, these groups are highly visible, facilitating the detection of opportunistic actions. Accordingly, reputation concerns should effectively constrain group behavior. On the other hand, these groups are highly complex, making it difficult for outsiders to unveil group strategies from among a myriad of transactions. This complexity should limit the power of reputation concerns to constrain actions. We use data on IPO initial returns to evaluate the trade-off between visibility and complexity. The evidence suggests that complexity dominates visibility, providing scope for opportunistic behavior against outside investors.

meeting of the German Finance Association and seminar participants at the ESSFM 2001 in Gerzensee, and at the universities of Frankfurt and Zürich for valuable comments.