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Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types of companies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types of companies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types ofcompanies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities andcompetition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types of companies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types ofcompanies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types ofcompanies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five plus percent per annum relative to the aggregate public equity market. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types of companies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds' portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Venture capital, Private equity, Liquidity

Abstract:
This article surveys the theoretical and empirical literature on the IPO underpricing phenomenon.

Abstract:
Our model of the initial public offering process links the three main empirical IPO anomalies underpricing, hot issue markets, and long-run underperformance and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000 market for Internet IPOs) to the presence of a class of investors who are irrational in the sense of having exuberant expectations regarding future performance. Underpricing and long-run underperformance emerge as underwriters attempt to maximize profits from the sale of equity, at the expense of these exuberant investors. Underpricing serves to compensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.

Abstract:
Our model of the initial public offering process links the three main empirical IPO anomalies underpricing, hot issue markets, and long-run under performance and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000market for Internet IPOs) to the presence of a class of investors who are irrational inthe sense of having exuberant expectations regarding future performance. Underpricingand long-run under performance emerge as underwriters attempt to maximize profits fromthe sale of equity, at the expense of these exuberant investors. Underpricing serves tocompensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.

Abstract:
We model an IPO company's optimal response to the presence of sentiment investors and short sale constraints. Given regulatory constraints on price discrimination, the optimal mechanism involves the issuer allocating stock to 'regular' institutional investors for subsequent resale to sentiment investors, at prices the regulars maintain by restricting supply. Because the hot market can end prematurely, carrying IPO stock in inventory is risky, so to break even in expectation regulars require the stock to be underpriced - even in the absence of asymmetric information. However, the offer price still exceeds fundamental value, as it capitalizes the regulars' expected gain from trading with the sentiment investors. This resolves the apparent paradox that issuers, while shrewdly timing their IPOs to take advantage of optimistic valuations, appear not to price their stock very aggressively. The model generates a number of new and refutable empirical predictions regarding the extent of long-run underperformance, offer size, flipping, and lock-ups.

Initial public offerings, hot issue markets, behavioural finance, long-run performance

Abstract:
We model an IPO company's optimal response to the presence of sentiment investors and short sale constraints. Given regulatory constraints on price discrimination, the optimal mechanism involves the issuer allocating stock to 'regular' institutional investors for subsequent resale to sentiment investors, at prices the regulars maintain by restricting supply. Because the hot market can end prematurely, carrying IPO stock in inventory is risky, so to break even in expectation regulars require the stock to be underpriced - even in the absence of asymmetric information. However, the offer price still exceeds fundamental value, as it capitalizes the regulars' expected gain from trading with the sentiment investors. This resolves the apparent paradox that issuers, while shrewdly timing their IPOs to take advantage of optimistic valuations, appear not to price their stock very aggressively. The model generates a number of new and refutable empirical predictions regarding the extent of long-run underperformance, offer size, flipping, and lock-ups.

Initial public offerings, hot issue markets, behavioural finance, long-run performance

Abstract:
We document widespread ex post changes to the historical contents of the I/B/E/S analyst stock recommendations database. Across a sequence of seven downloads of the entire I/B/E/S recommendations database, obtained between 2000 and 2007, we find that between 6,594 (1.6%) and 97,579 (21.7%) of matched observations are different from one download to the next. The changes, which include alterations of recommendation levels, additions and deletions of records, and removal of analyst names, are non-random in nature: They cluster by analyst reputation, brokerage firm size and status, and recommendation boldness. The changes have a large and significant impact on the classification of trading signals and back-tests of three stylized facts: The profitability of trading signals, the profitability of changes in consensus recommendations, and persistence in individual analyst stock-picking ability.

Security analysts, Stock recommendations, Global Settlement, Career concerns, Forensic finance

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the investment behavior of private equity fund managers. Based on recent theoretical advances, we link the timing of funds investment and exit decisions, and the subsequent returns they earn on their portfolio companies, to changes in the demand for private equity in a setting where the supply of capital is sticky in the short run. We show that existing funds accelerate their investment flows and earn higher returns when investment opportunities improve and the demand for capital increases. Increases in supply lead to tougher competition for deal flow, and private equity fund managers respond by cutting their investment spending. These findings provide complementary evidence to recent papers documenting the determinants of fund-level performance in private equity.

Private equity, Venture capital, Alternative investments, Fund management

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the investment behavior of private equity fund managers. Based on recent theoretical advances, we link the timing of funds investment and exit decisions, and the subsequent returns they earn on their portfolio companies, to changes in the demand for private equity in a setting where the supply of capital is sticky in the short run. We show that existing funds accelerate their investment flows and earn higher returns when investment opportunities improve and the demand for capital increases. Increases in supply lead to tougher competition for deal flow, and private equity fund managers respond by cutting their investment spending. These findings provide complementary evidence to recent papers documenting the determinants of fund-level performance in private equity.

Private equity, Venture capital, Alternative investments, Fund management

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the investment behavior of private equity fund managers. Based on recent theoretical advances, we link the timing of funds investment and exit decisions, and the subsequent returns they earn on their portfolio companies, to changes in the demand for private equity in a setting where the supply of capital is sticky in the short run. We show that existing funds accelerate their investment flows and earn higher returns when investment opportunities improve and the demand for capital increases. Increases in supply lead to tougher competition for deal flow, and private equity fund managers respond by cutting their investment spending. These findings provide complementary evidence to recent papers documenting the determinants of fund-level performance in private equity.

Private equity, Venture capital, Alternative investments, Fund management

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the investment behavior of private equity fund managers. Based on recent theoretical advances, we link the timing of funds investment and exit decisions, and the subsequent returns they earn on their portfolio companies, to changes in the demand for private equity in a setting where the supply of capital is sticky in the short run. We show that existing funds accelerate their investment flows and earn higher returns when investment opportunities improve and the demand for capital increases. Increases in supply lead to tougher competition for deal flow, and private equity fund managers respond by cutting their investment spending. These findings provide complementary evidence to recent papers documenting the determinants of fund-level performance in private equity.

Private equity, Venture capital, Alternative investments, Fund management

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the investment behavior of private equity fund managers. Based on recent theoretical advances, we link the timing of funds' investment and exit decisions, and the subsequent returns they earn on their portfolio companies, to changes in the demand for private equity in a setting where the supply of capital is 'sticky' in the short run. We show that existing funds accelerate their investment flows and earn higher returns when investment opportunities improve and the demand for capital increases. Increases in supply lead to tougher competition for deal flow, and private equity fund managers respond by cutting their investment spending. These findings provide complementary evidence to recent papers documenting the determinants of fund-level performance in private equity.

Private equity, Venture capital, Alternative investments, Fund management

Abstract:
IPO initial returns reached astronomical levels during 1999-2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by a variety of marked changes in pre-IPO ownership structure and insider selling behavior over the period which reduced key decision-makers' incentives to control underpricing. After controlling for these changes, there appears to be little special about the 1999-2000 period, aside from the preponderance of internet and high-tech firms going public. Our results suggest that it was firm characteristics that were unique during the "dot-com bubble" and that pricing behavior followed from incentives created by these characteristics.

Initial public offerings, Underpricing, Intermediation, Internet, Hot issue markets

Abstract:
Shareholder agreements govern the relations among shareholders in privately-held companies, such as joint ventures or venture capital-backed firms. We provide an economic explanation for the use of put and call options, pre-emption rights, catch-up clauses, drag-along rights, demand rights, and tag-along rights in shareholder agreements. We view these clauses as a response to a problem of dynamic, double moral hazard, whereby the value of the venture depends on ex ante investments and ex post transfers. Contract clauses i) preserve the incentives to make ex ante investments and ii) minimize ex post transfers. We extend our framework to discuss the use of other clauses, such as the option to extend the life of a business alliance. (JEL: G34).

Shareholder Agreements, Put Options, Call Options, Pre-emption Rights, Catch-up Clauses, Drag-along Rights, Demand Rights, Tag-along Rights

Abstract:
Shareholder agreements govern the relations among shareholders in privately-held companies, such as joint ventures or venture capital-backed firms. We provide an economic explanation for the use of put and call options, preemption rights, catch-up clauses, drag-along rights, demand rights, andtag-along rights in shareholder agreements. We view these clauses as a response to a problem of dynamic, double moral hazard, whereby the value of the venture depends on ex ante investments and ex post transfers. Contract clauses i) preserve the incentives to make ex ante investments andii) minimize ex post transfers. We extend our framework to discuss the use of other clauses, such as the option to extend the life of a business alliance.

Shareholder Agreements, Put Options, Call Options, Pre-emption Rights, Catch-up Clauses, Drag-along Rights, Demand Rights, Tag-along Rights

Abstract:
Shareholder agreements govern the relations among shareholders in privately-held companies, such as joint ventures or venture capital-backed firms. We provide an explanation for the use of put and call options, pre-emption rights, drag-along rights, demand rights, tag-along rights, and catch-up clauses in shareholder agreements. We view these clauses as serving to preserve the parties' incentives to make ex ante investments when ex post renegotiation may alter the parties' shares of the payoff. We extend our framework to discuss the use of other clauses, such as the option to extend the life of a business alliance.

Shareholder agreements, put options, call options, pre-emption rights, drag-along rights, demand rights, tag-along rights, catch-up clauses

Abstract:
Shareholder agreements govern the relations among shareholders in privately-held firms, such as joint ventures or venture capital-backed firms. We provide an explanation for the use of put and call options, tag-along rights, drag-along rights, demand rights, piggy-back rights, and catch-up clauses in shareholder agreements. We view these clauses as serving (1) to induce the parties to make ex ante investments, (2) to preclude ex post transfers by the party that has the ability to engage in such transfers, and (3) to achieve the efficient ex post allocation of stakes in the firm.

Shareholder Agreements, Put Options, Call Options, Pre-emption Rights, Catch-up Clauses, Drag-along Rights, Demand Rights, Tag-along Rights

Abstract:
We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing returns, within the context of theories of book building. Using a sample of both U.S. and international IPOs we find evidence of the following:· IPO allocation policies favor institutional investors, both in the U.S. and worldwide.·Constraints on the discretion bankers exercise in the allocation of IPO shares reduce institutional allocations.·Constraints on allocation discretion result in offer prices that deviate less from the indicative price range established prior to bankers efforts to gauge demand among institutional investors. We interpret this as indicative of diminished information production.· Initial returns, which reflect a significant indirect cost of going public, are directly related to this measure of information production and inversely related to the fraction of shares allocated to institutional investors.

Initial public offerings, Bookbuilding, Underpricing, Intermediation

Abstract:
We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing and find that allocation policies favor institutional investors, both in the U.S. and worldwide increasing institutional allocations results in offer prices that deviate more from the premarketing price range constraints on bankers discretion reduce institutional allocations and result in smaller price revisions, indicating diminished information production initial returns are directly related to information production and inversely related to institutional allocations. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce indirect issuance costs for IPO firms.

Initial public offerings, Bookbuilding, Underpricing, Intermediation

Abstract:
We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing and find that 1) allocation policies favor institutional investors, both in the U.S. and worldwide; 2) increasing institutional allocations results in offer prices that deviate more from the pre-marketing price range; 3) constraints on bankers' discretion reduce institutional allocations and result in smaller price revisions, indicating diminished information production; and 4) initial returns are directly related to information production and inversely related to institutional allocations. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce indirect issuance costs for IPO firms.

Initial public offerings, Bookbuilding, Underpricing, Intermediation, Allocation policy

Abstract:
We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing returns, within the context of theories of bookbuilding. Using a sample of both US and international IPOs we find evidence of the following:

- IPO allocation policies favour institutional investors, both in the US and worldwide.

- Increasing institutional allocations results in offer prices that deviate more from the indicative price range established prior to bankers' efforts to gauge demand among institutional investors.

- Constraints on the discretion bankers exercise in the allocation of IPO shares reduce institutional allocations.

- Constraints on allocation discretion result in smaller price revisions. We interpret this as indicative of diminished information production.

- Initial returns, which reflect a significant indirect cost of going public, are directly related to our measure of information production and inversely related to the fraction of shares allocated to institutional investors. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce issuance costs for firms attempting to go public.

Initial public offerings, bookbuilding, underpricing, intermediation

Abstract:
We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing and find that 1) allocation policies favor institutional investors, both in the U.S. and worldwide; 2) increasing institutional allocations results in offer prices that deviate more from the pre-marketing price range; 3) constraints on bankers' discretion reduce institutional allocations and result in smaller price revisions, indicating diminished information production; and 4) initial returns are directly related to information production and inversely related to institutional allocations. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce indirect issuance costs for IPO firms.

Initial public offerings, Bookbuilding, Underpricing, Intermediation, Allocation policy

Abstract:
We derive a behavioral measure of the IPO decision-maker s satisfaction with the underwriter s performance based on Loughran and Ritter s (2002) application of prospect theory to IPO underpricing. We assess the plausibility of this measure by studying its power to explain the decision-maker s subsequent choices. Controlling for other known factors, IPO firms are less likely to switch underwriters for their first seasoned equity offering when our behavioral measure indicates they were satisfied with the IPO underwriter s performance. Underwriters also appear to benefit from behavioral biases in the sense that they extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest there is explanatory power in the behavioral model, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.

Prospect theory, Behavioral finance, Initial public offerings, Underpricing

Abstract:
We derive a behavioral measure of the IPO decision-maker s satisfaction with the underwriter s performance based on Loughran and Ritter s (2002) application of prospect theory to IPO underpricing. We assess the plausibility of this measure by studying its power to explain the decision-maker s subsequent choices. Controlling for other known factors, IPO firms are less likely to switch underwriters for their first seasoned equity offering when our behavioral measureindicates they were satisfied with the IPO underwriter s performance. Underwriters also appear to benefit from behavioral biases in the sense that they extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest there is explanatory power in the behavioral model, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.

Prospect theory, Behavioral finance, Initial public offerings, Underpricing

Abstract:
We derive a behavioral measure of the IPO decision-maker's satisfaction with the underwriter's performance based on Loughran and Ritter (2002) and assess its ability to explain the decision-maker's choice among underwriters in subsequent securities offerings. Controlling for other known factors, IPO firms are less likely to switch underwriters for their first seasoned equity offering when our behavioral measure indicates they were satisfied with the IPO underwriter's performance. Underwriters also extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest there is explanatory power in the behavioral model, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.

Abstract:
Many financial markets are characterized by strong relationships and networks, rather than arm's-length, spot-market transactions. We examine the performance consequences of this organizational choice in the context of relationships established when VCs syndicate portfolio company investments. VC firms that enjoy more influential network positions have significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or sale to another company. Similarly, the portfolio companies of better-networked VC firms are significantly more likely to survive to subsequent financing and to eventual exit. Finally, we provide initial evidence on the evolution of VC networks.

Venture Caputal, Networks, Syndiation, Performance

Abstract:
Many financial markets are characterized by strong relationships and networks, rather than arm's-length, spot-market transactions. We examine the performance consequences of this organizational choice in the context of relationships established when VCs syndicate portfolio company investments. VC firms that enjoy more influential network positions have significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or sale to another company. Similarly, the portfolio companies of better-networked VC firms are significantly more likely to survive to subsequent financing and to eventual exit. Finally, we provide initial evidence on the evolution of VC networks.

Venture Capital, Networks, Syndication, Investment Performance

Abstract:
We test recent theories of when companies go public which predict that 1) more companies will go public when outside valuations are high or have increased, 2) companies prefer going public when uncertainty about their future profitability is high, and 3) firms whose controlling shareholders enjoylarge private benefits of control are less likely to go public. Our analysis tracks a set of 330 privatelyheld German firms which between 1984 and 1995 announced their intention to go public to see whether, when, and how they subsequently sold equity to outside investors. Controlling for privatebenefits, we find that the likelihood of firms completing an initial public offering increases in the firm s investment opportunities and valuations. We also show that these effects are distinct from factors that increase firms demand for outside capital more generally.

Going public decision, IPO timing, Private benefits, Private benefits

Abstract:
We test recent theories of when companies go public which predict that 1) more companies will go public when outside valuations are high or have increased, 2) companies prefer going public when uncertainty about their future profitability is high, and 3) firms whose controlling shareholders enjoy large private benefits of control are less likely to go public. Our analysis tracks a set of 330 privately held German firms which between 1984 and 1995 announced their intention to go public to see whether, when, and how they subsequently sold equity to outside investors. Controlling for private benefits, we find that the likelihood of firms completing an initial public offering increases in the firm's investment opportunities and valuations. We also show that these effects are distinct from factors that increase firms' demand for outside capital more generally.

Going public decision; IPO timing; Private benefits; Family firms.

Abstract:
We provide a direct estimate of the magnitude of agency costs in publicly-held corporations. We compute an explicit performance benchmark that compares a firm's actual Tobin's Q to the Q* of a hypothetical value-maximizing firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 16% below its Q*, equivalent to a $1,432 million reduction in its potential market value. We relate the shortfall in value to the incentives provided to CEOs. Boards appear to grant CEOs too few shares and too many options which are insufficiently sensitive to firm risk.

Abstract:
We investigate directly whether analyst behavior influenced the likelihood of banks winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings sold between December 1993 and June 2002. We control for the strength of the issuer s investment-banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank s decision to provide analyst coverage. We find no evidence that aggressive analyst recommendations or recommendation upgrades increased their bank s probability of winning an underwriting mandate after controlling for analysts career concerns and bank reputation. Our findings might be interpreted as suggesting that bank and analyst credibility are central to resolving information frictions associated with securities offerings

Analyst behavior, Underwriting, Commercial banks, Glass-Steagall Act

Abstract:
We investigate directly whether analyst behavior influenced the likelihood of banks winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings sold between December 1993 and June 2002. We control for the strength of the issuer s investment-banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank s decision to provide analyst coverage. We find no evidence that aggressive analyst recommendations or recommendation upgrades increased their bank s probability of winning an underwriting mandate after controlling for analysts career concerns and bank reputation. Our findings might be interpreted as suggesting that bank and analyst credibility are central to resolving information frictions associated with securities offerings.

Analyst behavior, Underwriting, Commercial banks, Glass-Steagall Act

Abstract:
We investigate directly whether analyst behavior influenced the likelihood of banks winning underwriting mandates for a sample of 16,456 U.S. debt and equity offerings sold between December 1993 and June 2002. We control for the strength of the issuer s investment-banking relationships with potential competitors for the mandate and for the endogeneity of analyst behavior and the bank s decision to provide analyst coverage. Contrary to recent allegations, we find no evidence that aggressive analyst recommendations or recommendation upgrades increased a bank s probability of winning an underwriting mandate once we control for analysts career concerns. In fact, the opposite appears to be the case. Nor do we find that banks competed successfully for equity deals on the basis of their ability to make low-cost corporate loans available. Only among debt deals sold since the deregulation of commercial banks is there evidence of aggressive recommendations helping banks to win underwriting mandates.

Analyst behavior, Underwriting, Commercial banks, Glass-Steagall Act

Abstract:
We investigate whether analyst behavior influenced banks' likelihood of winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings in 1993 to 2002. We control for the strength of the issuer's investment banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank's decision to provide analyst coverage. Although analyst behavior was influenced by economic incentives, we find no evidence that aggressive analyst behavior increased their bank's probability of winning an underwriting mandate. The main determinant of the lead-bank choice is the strength of prior underwriting and lending relationships.

Analyst behavior, Underwriting, Commercial banks, Glass-Steagall Act

Abstract:
We investigate directly whether analyst behaviour influenced the likelihood of banks winning underwriting mandates for a sample of 16,625 US debt and equity offerings sold between December 1993 and June 2002. We control for the strength of the issuer's investment-banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behaviour and the bank's decision to provide analyst coverage. Contrary to recent allegations, we find no evidence that aggressive analyst recommendations or recommendation upgrades increased a bank's probability of winning an underwriting mandate once we control for analysts' career concerns. In fact, the opposite appears to be the case. We interpret this finding as evidence that credibility is central to resolving information frictions associated with securities offerings. Overly aggressive analyst behaviour undermines credibility.

Abstract:
We investigate directly whether analyst behavior influenced the likelihood of banks winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings sold between December 1993 and June 2002. We control for the strength of the issuer's investment-banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank's decision to provide analyst coverage. We find no evidence that aggressive analyst recommendations or recommendation upgrades increased their bank's probability of winning an underwriting mandate after controlling for analysts' career concerns and bank reputation. Our findings might be interpreted as suggesting that bank and analyst credibility are central to resolving information frictions associated with securities offerings.

Analyst behavior, Underwriting, Commercial banks, Glass-Steagall Act

Abstract:
This paper analyzes the determinants of buyout funds investment decisions. In a model in which the supply of capital is sticky in the short run, we link the timing of funds investment decisions, their risk-taking behavior, and the returns they subsequently earn on their buyouts tochanges in the demand for private equity, conditions in the credit market, and funds ability to influence their perceived talent in the market. Using a proprietary dataset of 207 buyout funds that invested in 2,274 buyout targets over the last two decades, we then investigate the implications of the model. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is freefrom reporting and survivor biases. Thus, we are able to characterize every buyout fund s precise investment choices. Our empirical findings are consistent with the model. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Fourth, following periods of good performance, funds become more conservative, and this effect is stronger for youngerfunds.

Private equity, Buyout funds, Alternative investments, Fund management

Abstract:
This paper analyzes the determinants of buyout funds' investment decisions. In a model in which the supply of capital is sticky in the short run, we link the timing of funds' investment decisions, their risk-taking behavior, and the returns they subsequently earn on their buyouts to changes in the demand for private equity, conditions in the credit market, and funds' ability to influence their perceived talent in the market. Using a proprietary dataset of 207 buyout funds that invested in 2,274 buyout targets over the last two decades, we then investigate the implications of the model. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our empirical findings are consistent with the model. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Fourth, following periods of good performance, funds become more conservative, and this effect is stronger for younger funds.

Abstract:
This paper analyzes the determinants of buyout funds' investment decisions. In a model in which the supply of capital is 'sticky' in the short run, we link the timing of funds' investment decisions, their risk-taking behavior, and the returns they subsequently earn on their buyouts to changes in the demand for private equity, conditions in the credit market, and funds' ability to influence their perceived talent in the market. Using a proprietary dataset of 207 buyout funds that invested in 2,274 buyout targets over the last two decades, we then investigate the implications of the model. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our empirical findings are consistent with the model. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Fourth, following periods of good performance, funds become more conservative, and this effect is stronger for younger funds.

Private equity, Buyout funds, Alternative investments, Fund management

Abstract:
We model owners as solving a multidimensional problem when taking their firms public. Owners can affect the level of underpricing through the choices they make in promoting an issue, such as which underwriter to hire or what exchange to list on. The benefits of reducing underpricing in this way depend on the owners' participation in the offering and the magnitude of the dilution they suffer on retained shares. We argue that the extent to which owners trade-off underpricing and promotion is determined by the minimization of their wealth losses. Evidence from a sample of U.S. IPOs confirms our empirical predictions.

Abstract:
We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank s compensation more sensitive to the issuer s valuation should reduce agency conflicts and thus underpricing. Consistent with this prediction, we show that contracting on higher commissions in U.K. IPOs leads to significantly lower underpricing: a one percentage point increase in the commission rate reduces the initial return by 11 percentage points, after controlling for other influences on underpricing. Moreover, we present evidence consistent with issuers choosing commission rates optimally. Overall, our results indicate that issuers and banks contract efficiently in U.K. IPOs.

Abstract:
We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank s compensation more sensitive to the issuer s valuation should reduce agency conflicts and thus underpricing. Consistent with this prediction, we show that contracting on higher commissions in U.K. IPOsleads to significantly lower underpricing: a one percentage point increase in the commission rate reduces the initial return by 11 percentage points, after controlling for other influences on underpricing. Moreover, we present evidence consistent with issuers choosing commission ratesoptimally. Overall, our results indicate that issuers and banks contract efficiently in U.K. IPOs.

Initial public offerings, Underpricing, Intermediation, Integrated securities houses, Underwriting contracts

Abstract:
We study the role of underwriter compensation in mitigating conflicts of interest betweencompanies going public and their investment bankers. Making the bank s compensation moresensitive to the issuer s valuation should reduce agency conflicts and thus underpricing. Consistent with this prediction, we show that contracting on higher commissions in U.K. IPOs leads to significantly lower underpricing: a one percentage point increase in the commission rate reduces the initial return by 11 percentage points, after controlling for other influences on underpricing. Moreover, we present evidence consistent with issuers choosing commission rates optimally. Overall, our results indicate that issuers and banks contract efficiently in U.K. IPOs.

Initial public offerings, Underpricing, Intermediation, Integrated securities houses, Underwriting contracts

Abstract:
We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank's compensation more sensitive to the issuer's valuation should reduce agency conflicts and thus underpricing (Baron (1982); Biais, Bossaerts, and Rochet (2002)). Consistent with this prediction, we show that contracting on higher commissions in a large sample of UK IPOs completed between 1991-2002 leads to significantly lower initial returns, after controlling for other influences on underpricing and a variety of endogeneity concerns. These results indicate that issuing firms' contractual choices affect the pricing behaviour of their IPO underwriters. Moreover, we cannot reliably reject the hypothesis that the intensity of incentives is optimal, and so that contracts are efficient.

Abstract:
We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank's compensation more sensitive to the issuer's valuation should reduce agency conflicts and thus underpricing (Baron (1982), Biais, Bossaerts, and Rochet (2002)). Consistent with this prediction, we show that contracting on higher commissions in a large sample of U.K. IPOs completed between 1991 and 2002 leads to significantly lower initial returns, after controlling for other influences on underpricing and a variety of endogeneity concerns. These results indicate that issuing firms' contractual choices affect the pricing behavior of their IPO underwriters. Moreover, we cannot reliably reject the hypothesis that the intensity of incentives is optimal, and so that contracts are efficient.

Initial public offerings, Underpricing, Intermediation, Integrated securities houses, Underwriting contracts

Abstract:
We present evidence that firms attempting IPOs learn from the experience of their contemporaries. These information spillovers affect revisions in offer terms and the decision whether to carry through with an offering. The evidence also supports the argument that IPOs are implicitly bundled as a means of promoting more equitable sharing of information production costs. One apparent consequence of this behavior is that while initial returns and IPO volume are positively correlated in the aggregate, the correlation is negative among contemporaneous offerings subject to a common valuation factor. These findings are consistent with the Benveniste, Busaba, and Wilhelm (2001) argument that the dynamics of volume and initial returns in primary equity markets reflect, at least in part, an institutional response to information externalities.

Initial Public Offerings, investment banking, information externalities, going public decision

Abstract:
Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensivesample of analyst recommendations over the 1994-2000 period, we find that analysts recommendations relative to consensus are positively associated with investment bankingrelationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Abstract:
Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensivesample of analyst recommendations over the 1994-2000 period, we find that analysts recommendations relative to consensus are positively associated with investment bankingrelationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Analyst recommendations, Analyst forecast accuracy, Investment banking, Banking Relationships

Abstract:
Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts' recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Analyst recommendations, analyst forecast accuracy, investment banking, conflicts of interest, institutional investors, banking relationships

Abstract:
Sell-side analysts face pressure to provide favorable opinions on their employers' investment banking clients and to boost brokerage business, yet institutional investors value unbiased research. Because of their dependence on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to pressure in stocks that are highly visible to their institutional investor constituency. Given the apparent severity of analyst conflicts of interest in the late 1990s, we examine a comprehensive sample of analyst recommendations over the 1994-2000 period. We find that analysts' recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investors in the firm being followed. This is especially true when there are more institutions holding larger blocks in the firm, and for firms whose institutional holdings are concentrated in the hands of the largest institutional investors. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Analyst recommendations, Analyst forecast accuracy, Investment banking, Conflicts of Interest, Institutional investors, Banking Relationships

Abstract:
We examine whether irrational behavior among small (retail) investors drives post-IPO prices. We use prices from the grey market (the when-issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating excessive optimism) are a very good predictor of first-day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long-run price reversal only following high grey market prices. Thus, small investors sometimes drive post-IPO prices temporarily upwards, but never downwards. This asymmetric pattern obtains because the larger (institutional) investors who are allocated IPO shares sell them to small investors in the aftermarket when the small investors are overoptimistic, but ignoring them when they are excessively pessimistic.

Investor sentiment, IPOs, grey markets

Abstract:
We examine whether networks among incumbent venture capital firms help restrict entryinto local VC markets in the U.S., thus improving VCs bargaining power overentrepreneurs. We show that VC markets with more extensive networking among theincumbent players experience less entry. The effect is sizeable economically and appearsrobust to plausible endogeneity concerns. Entry is accommodated if the entrant hasestablished relationships with a target-market incumbent in its own home market. In turn, incumbents react strategically to an increased threat of entry, in the sense that they freezeout any incumbent that builds a relationship with a potential entrant. Finally, companiesseeking venture capital raise money on worse terms in more densely networked marketswhile increased entry is associated with higher valuations.

Venture Capital, Start-up Financing, Networks, Syndication, Barriers to Entry, Entry Deterrence

Abstract:
We examine whether networks among incumbent venture capital firms help restrict entryinto local VC markets in the U.S., thus improving VCs bargaining power over entrepreneurs. We show that VC markets with more extensive networking among the incumbent players experience less entry. The effect is sizeable economically and appears robust to plausible endogeneity concerns. Entry is accommodated if the entrant has established relationships with a target-market incumbent in its own home market. In turn, incumbents react strategically to an increased threat of entry, in the sense that they freeze out any incumbent that builds a relationship with a potential entrant. Finally, companies seeking venture capital raise money on worse terms in more densely networked markets while increased entry is associated with higher valuations.

Venture Capital, Start-up Financing, Networks, Syndication, Barriers to Entry, Entry Deterrence

Abstract:
We examine whether strong networks among incumbent venture capital firms help restrict entry into local VC markets in the U.S., thus improving VCs' bargaining power over entrepreneurs. We show that VC markets with more extensive networking among the incumbent players experience less entry. The effect is sizeable economically and appears robust to plausible endogeneity concerns. Entry is accommodated if the entrant has established relationships with a target-market incumbent in its own home market. In turn, incumbents react strategically to an increased threat of entry, in the sense that they freeze out any incumbent that builds a relationship with a potential entrant. Finally, companies seeking venture capital raise money on worse terms in more densely networked markets while increased entry is associated with higher valuations.

Venture Capital, Start-up Financing, Networks, Syndication, Barriers to Entry, Entry Deterrence

Abstract:
This paper uses clinical evidence to show how the German system of corporate control and governance is both more active and more hostile than has previously been suggested. It provides a complete breakdown of ownership and takeover defence patterns in German listed companies and finds highly fragmented (but not dispersed) ownership in non-majority controlled firms. We document how the accumulation of hostile stakes can be used to gain control of target companies given these ownership patterns. The paper also suggests an important role for banks in helping predators accumulate, and avoid the disclosure of, large stakes.

Abstract:
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the investment behavior of private equity fund managers. Based on recent theoretical advances, we link the timing of funds' investment and exit decisions, and the subsequent returns they earn on their portfolio companies, to changes in the demand for private equity in a setting where the supply of capital is 'sticky' in the short run. We show that existing funds accelerate their investment flows and earn higher returns when investment opportunities improve and the demand for capital increases. Increases in supply lead to tougher competition for deal flow, and private equity fund managers respond by cutting their investment spending. These findings provide complementary evidence to recent papers documenting the determinants of fund-level performance in private equity.

Private Equity, Investment decisions, Venture Capital

Abstract:
We examine the costs and benefits of the global integration of primary equity markets associated with the parallel diffusion of U.S. underwriting methods. We analyze both direct and indirect costs (associated with underpricing) using a unique dataset of 2,132 IPOs by non-U.S. issuers from 65 countries in 1992-1999. Bookbuilding typically costs twice as much as a fixed-price offer, but on its own, does not lead to lower underpricing. However, when conducted by U.S. banks and/or targeted at U.S. investors, bookbuilding can reduce underpricing significantly, relative to fixed-price offerings or bookbuilding efforts conducted by local banks. These results are obtained after allowing for the endogeneity and interdependence of issuers choices. For the great majority of issuers, the gains associated with lower underpricing outweighed the additional costs associated with hiring U.S. banks or marketing in the U.S. This suggests a quality/price trade-off contrasting with the findings of Chen and Ritter [Journal of Finance 55, 2000], particularly since non-U.S. issuers raising US$20m-80m also typically pay a 7% spread when U.S. banks and investors are involved.

Initial public offerings, bookbuilding, underwriting spreads, market integration

Abstract:
We examine the costs and benefits of the global integration of IPO markets associated with the diffusion of U.S. underwriting methods in the 1990s. Bookbuilding is becoming increasingly popular outside the U.S. and typically costs twice as much as a fixed-price offer. However, on its own bookbuilding only leads to lower underpricing when conducted by U.S. banks and/or targeted at U.S. investors. For most issuers, the gains associated with lower underpricing outweighed the additional costs associated with hiring U.S. banks or marketing in the U.S. This suggests a quality/price trade-off contrasting with the findings of Chen and Ritter [Journal of Finance, 2000], particularly since non-U.S. issuers raising US$20m-80m also typically pay a 7% spread when U.S. banks and investors are involved.

Initial public offerings, bookbuilding, underwriting spreads, international finance, market integration

Abstract:
We examine the costs and benefits of the global integration of IPO markets associated with the diffusion of U.S. underwriting methods in the 1990s. Bookbuilding is becoming increasingly popular outside the U.S. and typically costs twice as much as a fixed-price offer. However, on its own bookbuilding only leads to lower underpricing when conducted by U.S. banks and/or targeted at U.S. investors. For most issuers, the gains associated with lower underpricing outweighed the additional costs associated with hiring U.S. banks or marketing in the U.S. This suggests a quality/price trade-off contrasting with the findings of Chen and Ritter [Journal of Finance], particularly since non-U.S. issuers raising USS20m-80m also typically pay a 7% spread when U.S. banks and investors are involved.

Initial public offerings, bookbuilding, underwriting spreads, international finance, market integration

Abstract:
We estimate the value added by sell-side equity research analysts and explore the links between analyst research, informational efficiency, and asset prices. We identify the value of research from exogenous changes in analyst coverage. On announcement that a stock has lost all coverage, share prices fall by around 110 basis points or $8.4 million on average. The share price reaction is attenuated the more analysts continue to cover the stock, suggesting that there are diminishing returns to coverage at the margin. The adverse effect of coverage terminations is proportional to the analyst's reputation and experience and to the size of the broker's retail sales force. Exogenous reductions in coverage are followed by: less efficient pricing and lower liquidity; greater earnings surprises and more volatile trading around subsequent earnings announcements; increases in required returns; and reduced return volatility. Simulations suggest investors can trade profitably on the volatility changes. Finally, retail investors sell and large institutional investors buy around coverage terminations, suggesting that different investor clienteles have different demands for analyst research.

Sell-side research, Coverage terminations, Informational efficiency, Trading strategies, Global Settlement

Abstract:
We document that firms appear disinclined to share underwriters with other firms in the same industry. We show that this disinclination is evident only when firms engage in product-market competition. This leads us to suggest that concerns about information leakage may motivate thepatterns we see in the data. We discuss how these effects help us understand how the investment banking industry is structured, how banks compete, and how prices are set. At each step we exploit sources of exogenous variation that correspond to specific margins on which the effects of interest directly influence incentives and choices.

Abstract:
We show that information flows between investment banks and firms issuing securities affect the pattern of bank-firm relationships and that shocks to these information flows affect the real economy. Firms appear disinclined to share investment banks with other firms in the same industry, but only when the firms engage in product-market competition. This is consistent with concerns about the disclosure of commercially sensitive information to strategic rivals governing firms' investment bank choices. Using exogenous shocks to information flows arising from mergers among banks, we show that the desire to avoid sharing investment banks has a substantial effect on firms' investment in capital stock. We discuss how these information effects might help us understand how the investment banking industry is structured, how banks compete, and how prices are set.

Investment banking, Securities underwriting, Competition, Bank deregulation, Bank entry, Glass-Steagall Act, Commercial banks

Abstract:
We show that relatively optimistic research and even the mere provision of research coverage for the issuer (regardless of its direction) attract co-management appointments for securities offerings. Co-management appointments are valuable because they help banks establish relationships with issuers. These relationships, in turn, substantially increase the banks’ chances of winning more lucrative lead-management mandates in the future. This is true even in the presence of historically exclusive banking relationships.

G21, G24

Abstract:
We investigate why banks pressured research analysts to provide aggressive assessments ofissuing firms during the 1990s. This competitive strategy did little to directly increase a bank s chances of winning lead-management mandates and ultimately led to regulatory penalties and costly structural reform. We show that aggressively optimistic research and even the mere provision of research coverage for the issuer (regardless of its direction) attract co-managementappointments. Co-management appointments are valuable because they help banks establishrelationships with issuers. These relationships, in turn, substantially increase their chances of winning more lucrative lead-management mandates in the future. This is true even in the presence of historically exclusive banking relationships. If recent regulatory reforms compromisethis entry mechanism, they may have the unintended consequence of diminishing competition among securities underwriters.

Underwriting syndicates, Commercial banks, Glass-Steagall Act, Global Settlement, Analyst behavior

Abstract:
We investigate the empirical puzzle why banks pressured their analysts to provide aggressiveassessments of issuing firms during the 1990s when doing so apparently had little positive effect on their chances of receiving lead-management appointments and ultimately led to regulatory penalties and costly structural reform. We show that aggressively optimistic research can attract co-management appointments and that co-management appointments eventually lead to more lucrative lead-management opportunities. Our results suggest a potential unintended anticompetitive effect of the Global Settlement if forcing greater separation of research and investment banking diminishes co-management opportunities for (and thereby potential competition from) marginal competitors in securities underwriting, especially in the debt markets.

Underwriting syndicates, Commercial banks, Glass-Steagall Act, Global Settlement, Analyst behavior

Abstract:
We investigate the empirical puzzle why banks pressured their analysts to provide aggressiveassessments of issuing firms during the 1990s when doing so apparently had little positive effect on their chances of receiving lead-management appointments and ultimately led to regulatory penalties and costly structural reform. We show that aggressively optimistic research can attract co-management appointments and that co-management appointments eventually lead to more lucrative lead-management opportunities. Our results suggest a potential unintended anticompetitive effect of the Global Settlement if forcing greater separation of research and investment banking diminishes co-management opportunities for (and thereby potential competition from) marginal competitors in securities underwriting, especially in the debt markets.

Underwriting syndicates, Commercial banks, Glass-Steagall Act, Global Settlement, Analyst behavior

Abstract:
We investigate why banks pressured research analysts to provide aggressive assessments of issuing firms during the 1990s. This competitive strategy did little to directly increase a bank's chances of winning lead-management mandates and ultimately led to regulatory penalties and costly structural reform. We show that aggressively optimistic research and even the mere provision of research coverage for the issuer (regardless of its direction) attract co-management appointments. Co-management appointments are valuable because they help banks establish relationships with issuers. These relationships, in turn, substantially increase their chances of winning more lucrative lead-management mandates in the future. This is true even in the presence of historically exclusive banking relationships. If recent regulatory reforms compromise this entry mechanism, they may have the unintended consequence of diminishing competition among securities underwriters.

Underwriting syndicates, Commercial banks, Glass-Steagall Act, Global Settlement, Analyst behavior

Abstract:
We test models of asset pricing under asymmetric information using plausibly exogenous variation in the supply of information caused by the closure or restructuring of brokerage firms research operations. Consistent with predictions derived from a Grossman and Stiglitz-type model, share prices and uninformed investors demands fall as information asymmetry increases. Cross-sectional tests support the comparative statics. Prices and uninformed demand experience larger declines, the more investors are uninformed, the larger and more variable is turnover, the more uncertain is the asset s payoff, and the noisier is the better-informed investors signal. We show that prices fall because expected returns become more sensitive to a liquidity-risk factor.

Abstract:
Theoretical asset pricing models routinely assume that investors have heterogeneous information. We provide direct evidence of the importance of information asymmetry for asset prices and investor demands using plausibly exogenous variation in the supply of information caused by the closure of 43 brokerage firms' research operations in the U.S. Consistent with predictions derived from a Grossman and Stiglitz-type model, share prices and uninformed investors' demands fall as information asymmetry increases. Cross-sectional tests support the comparative statics: Prices and uninformed demand experience larger declines, the more investors are uninformed, the larger and more variable is stock turnover, the more uncertain is the asset's payoff, and the noisier is the better-informed investors' signal. We show that at least part of the fall in prices is due to expected returns becoming more sensitive to liquidity risk. Our results imply that information asymmetry has a substantial effect on asset prices and that a primary channel linking asymmetry to prices is liquidity.

Asymmetric-information asset pricing, liquidity, analyst coverage

Abstract:
We propose and test a theory of learning and informational hold-up in the venture capital market. The model predicts that higher returns on the current fund increase the probability that a VC will raise a follow-on fund, the size of the follow-on fund, and the performance fee investors are charged in the follow-on fund. If learning is asymmetric, such that incumbent investors learn more about fund manager skill than potential new investors, the model also predicts persistence in returns, poor performance among first-time funds, persistence in investors from fund to fund, and over-subscription in follow-on funds raised by successful fund managers. Our empirical evidence is consistent with these predictions. The model provides a unified framework for understanding a series of empirical facts about the venture capital industry.

Venture Capital, Performance Persistence, Learning, Hold-up

Abstract:
We estimate the value added by sell-side equity research analysts and explore the links between analyst research, informational efficiency, and asset prices. We identify the value of research from exogenous changes in analyst coverage. On announcement that a stock has lost all coverage, share prices fall by around 110 basis points or $8.4 million on average. The share pricereaction is attenuated the more analysts continue to cover the stock, suggesting that there are diminishing returns to coverage at the margin. The adverse effect of coverage terminations is proportional to the analyst s reputation and experience and to the size of the broker s retail sales force. Exogenous reductions in coverage are followed by: less efficient pricing and lower liquidity; greater earnings surprises and more volatile trading around subsequent earningsannouncements; increases in required returns; and reduced return volatility. Simulations suggest investors can trade profitably on the volatility changes. Finally, retail investors sell and large institutional investors buy around coverage terminations, suggesting that different investor clienteles have different demands for analyst research.

Sell-side research, Coverage terminations, Informational efficiency, Global Settlement

Abstract:
We document widespread ex post changes to the historical contents of the I/B/E/S analyst stock recommendations database. Across a sequence of seven downloads of the entire I/B/E/S recommendations database, obtained between 2000 and 2007, we find that between 6,594 (1.6%) and 97,579 (21.7%) of matched observations are different from one download to the next. The changes, which include alterations of recommendation levels, additions and deletions of records, and removal of analyst names, are non-random in nature: They cluster by analyst reputation, brokerage firm size and status, and recommendation boldness. The changes have a large and significant impact on the classification of trading signals and back-tests of three stylized facts: The profitability of trading signals, the profitability of changes in consensus recommendations, and persistence in individual analyst stock-picking ability.

Security analysts, Stock recommendations, Global Settlement, Stock-picking ability, Forensic finance

Abstract:
Many financial markets are characterized by strong relationships and networks, rather than arm s-length, spot-market transactions. We examine the performance consequences of this organizational choice in the context of relationships established when VCs syndicate portfolio company investments, using acomprehensive sample of U.S. based VCs over the period 1980 to 2003. VC funds whose parent firms enjoy more influential network positions have significantly better performance, as measured by the proportion of portfolio company investments that are successfully exited through an initial public offering or a sale to another company. Similarly, the portfolio companies of better networked VC firms are significantly more likely to survive to subsequent rounds of financing and to eventual exit. The magnitudeof these effects is economically large, and is robust to a wide range of specifications. Once we control for network effects in our models of fund and portfolio company performance, the importance of how muchinvestment experience a VC has is reduced, and in some specifications, eliminated. Finally, we provide initial evidence on the evolution of VC networks.

Abstract:
IPO initial returns reached astronomical levels during 1999-2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by a variety of marked changes in pre-IPO ownership structure and insider selling behavior over theperiod which reduced key decision-makersâ¬" incentives to control underpricing. After controlling for these changes, there appears to be little special about the 1999-2000 period, aside from the preponderance of internet and high-tech firms going public. Our results suggest that it was firmcharacteristics that were unique during the â¬Sdot-com bubbleâ¬? and that pricing behavior followed from incentives created by these characteristics.

Initial public offerings, Underpricing; Intermediation, Internet, Hot issue markets

Abstract:
IPO underpricing reached astronomical levels during 1999 and 2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by marked changes in pre-IPO ownership structure and insider selling behavior over the period, which reduced key decision makers' incentives to control underpricing. After controlling for these changes, the difference in underpricing between 1999 and 2000 and the preceding three years is much reduced. Our results suggest that it was firm characteristics that were unique during the "dot-com bubble" and that pricing behavior followed from incentives created by these characteristics.

Abstract:
IPO initial returns reached astronomical levels during 1999-2000. We show that the regime shift in initial returns and other elements of pricing behaviour can be at least partially accounted for by a variety of marked changes in pre-IPO ownership structure and insider selling behaviour over the period which reduced key decision-makers' incentives to control underpricing. After controlling for these changes, there appears to be little special about the 1999-2000 period, aside from the preponderance of Internet and high-tech firms going public. Our results suggest that it was firm characteristics that were unique during the 'dot-com bubble' and that pricing behaviour followed from incentives created by these characteristics.

Initial public offerings, underpricing, intermediation, Internet, hot issue markets

Abstract:
Our model of the initial public offering process links the three main empirical IPO 'anomalies' - underpricing, hot issue markets, and long-run underperformance - and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000 market for Internet IPOs) to the presence of a class of investors who are 'irrational' in the sense of having exuberant expectations regarding future performance. Underpricing and long-run underperformance emerge as underwriters attempt to maximize profits from the sale of equity, at the expense of these exuberant investors. Underpricing serves to compensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.

Initial public offerings, hot issue markets, behavioural finance, long-run performance

Abstract:
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 presentand influences the pricing of newly listed firms.

Abstract:
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 behaviour 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.

Investor sentiment, IPOs, grey markets

Abstract:
We derive a behavioral measure of the IPO decision-maker's satisfaction with the underwriter's performance based on Loughran and Ritter's (2002) prospect theory of IPO underpricing. We assess the plausibility of this measure by studying its power to explain the decision-maker s subsequent choices. Controlling for other known factors, IPO firms are less likely to switch underwriters for their first seasoned equity offering when our behavioral measure indicates they were satisfied with the IPO underwriter s performance. Underwriters also appear to benefit from behavioral biases in the sense that they extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest there is explanatory power in the behavioral model, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.

Prospect theory, Behavioral finance, Initial public offerings, Underpricing

Abstract:
We analyze the choice between public and private equity financing of a unique, hand-collected sample of privately held firms that have indicated their willingness to raise outside equity. We document that these firms are remarkably similar at the time of the announcement, yet 71% complete an IPO, 18% sell equity privately, and the remaining firms do not raise capital at all. To understand what determines the ultimate outcome, we follow these firms over time and record what they might learn up to their final decision. We identify the marginal conditions that favor raising outside equity, and those that determine the choice between public and private equity. Our results show that firms react systematically to changes in market conditions, such as equity returns and the cost of capital, that occur after the announcement, controlling for capital constraints, ownership structure, and the motivation for raising outside capital.

Capital structure, capital constraints, private equity, going public decision

Abstract:
We analyze the choice between public and private equity financing of a unique, hand-collected sample of privately held firms that have indicated their willingness to raise outside equity. We document that these firms are remarkably similar at the time of the announcement, yet 71% complete an IPO, 18% sell equity privately, and the remaining firms do not raise capital at all. To understand what determines the ultimate outcome, we follow these firms over time and record what they might learn up to their final decision. We identify the marginal conditions that favor raising outside equity,and those that determine the choice between public and private equity. Our results show that firms react systematically to changes in market conditions, such as equity returns and the cost of capital, that occur after the announcement, controlling for capital constraints, ownership structure, and themotivation for raising outside capital.

Capital structure, capital constraints, private equity, going public decision