31 st March 2008Abstract: A central measure of the efficiency of the Initial Public Offering (IPO) market is the extent to which issues are underpriced. Legal, regulatory, disclosure and underwriting pressures have moulded the IPO market since World War II. This paper presents new and comprehensive evidence covering British IPOs since World War I. We find that during the period from 1917 to 1945, public offers were underpriced by an average of only 3.80%, as compared to 9.15 % in the period from 1946 to 1986 (when the UK stock market was deregulated). This substantial rise is robust to the inclusion of variables controlling for changes in firm risk and method of issue, and improvements in disclosure and the emergence of prestige underwriters.

Second re-submission to the Academy of Management Journal

This paper examines investment allocations in emerging markets by actively-managed U.S. mutual funds. We analyze both country- and firm-level characteristics and policies that influence these investment allocations. At the country-level, we find that U.S. funds invest more in open emerging markets with stronger shareholder rights, legal frameworks and accounting policies. After controlling for country characteristics, U.S. funds are found to invest more in large, growing firms with high analyst following and policies such as an ADR listing and more transparent accounting policies. The impact of an ADR listing and better accounting policies is most pronounced in countries with weaker investor protection. Our results suggest that steps can be taken both at the country- and the firm-level to create an environment conducive to foreign institutional investment.

This paper investigates underwriters' treatment of public information throughout the IPO pricing process. Two key findings emerge. First, public information is not fully incorporated into the initial price range. While the economic magnitude of the bias is small, it is puzzling because it is not clear who benefits from it. Further, it indicates that the filing range midpoint is not an unbiased predictor of the offer price, as prior literature has assumed. Second, while public information is similarly not fully incorporated into the final offer price, the small economic significance of this relation indicates that the IPO pricing process is almost efficient.

Aggregate real dividends paid by industrial firms increased over the past two decades even though, as Fama and French (2001a) document, the number of dividend payers decreased by over 50%. The reason is that (i) the reduction in payers occurs almost entirely among firms that paid very small dividends, and (ii) increased real dividends from the top payers swamp the modest dividend reduction from the loss of many small payers. These trends reflect high and increasing concentration in the supply of dividends which, in turn, reflects high and increasing earnings concentration. For example, the 25 firms that paid the largest dividends in 2000 account for a majority of the aggregate dividends and earnings of industrial firms. Industrial firms exhibit a two-tier structure in which a small number of firms with very high earnings collectively generates the majority of earnings and dominates the dividend supply, while the vast majority of firms has at best a modest collective impact on aggregate earnings and dividends.

Analysts ’ earnings forecasts are influenced by their desire to win investment banking clients. We hypothesize that the equity bull market of the 1990s, along with the boom in investment banking business, exacerbated analysts ’ conflict of interest and their incentives to adjust strategically forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises, the market’s response to surprises and forecast revisions, and in the predictability of non-negative surprises. Further confirmation is based on subsamples where conflicts of interest are more pronounced, including growth stocks and stocks

IPO firms ’ information precision is not only generally low, but also likely to be initially estimated with considerable error due to a lack of an information history. I find that the deviation between expected and realized information precision is predictably associated with the magnitude and the persistence of longrun abnormal returns after an IPO. An initial underestimation (overestimation) of information precision results in positive (negative) abnormal returns over the period investors update their beliefs. The positive abnormal returns of firms with unexpectedly high information precision are less persistent than the negative abnormal returns of firms with unexpectedly low information precision.

This paper investigates the internal versus external financing decisions among 1900 early stage privately held UK firms in 1996-1997. We study the factors that affect rejection rates in applications for outside finance among the different types of investors, taking into account the non-randomness in a firm’s decision to seek outside finance. The data support the traditional pecking order theory; firms with greater capital expenditures / profits are more likely to seek finance and apply for more external finance. The data further indicate growth oriented firms are much more likely to apply for external finance. There are some differences in the internal versus external financing of female and male founder CEO firms, but these differences are largely attributable to growth orientation. Firms in industries with a greater proportion of larger competitors are less likely to obtain all of their desired outside capital. The data also indicate banks are less likely to finance completely new startups, while venture capital funds are more likely to finance innovative and growth orientated firms. Overall, the data

Financial scholars who research the initial underpricing and long-term underperformance of IPOs generally attribute these phenomena to information asymmetry and investors’ misevaluations. Here, we identify a widespread source of information asymmetry and valuation uncertainty—the R&D activities of issuers—and document that these activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their long-term performance (R&D is positively related to long-term performance). Given the pervasiveness and constant growth of firms ’ R&D activities in modern economies, our identification of R&D as a major factor affecting IPO’s performance contributes to the understanding of this important economic and capital market phenomenon. Keywords: R&D, IPO’s performance, information asymmetry, investor optimism. 1 Explaining the Short- and Long-Term IPO Anomalies by R&D Two persistent anomalies that characterize initial public offerings (IPOs)—the first-day underpricing and the long-term underperformance of certain IPOs—have intrigued academics and practitioners over the past two decades and have generated considerable research aimed at explaining the apparent incongruities with rational asset pricing. While this research effort has

What role do sentiment investors play in the pricing of newly listed stocks? We derive conditions under which we can distinguish between sentiment and rational pricing behavior and test for the rationality of small investors ’ demand for new stock issues using data from pre-issue (or ‘grey’) markets in Europe. Under sentiment, the model predicts asymmetric relations between the prices at which small investors trade new stock issues in the grey market and i) the subsequent issue price set by the investment bank, ii) prices in the early after-market, and iii) the degree of stock price reversal in the long run. Our empirical results suggest that sentiment demand is present and influences the pricing of newly listed firms.