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Abstract:
A number of firms in the United Kingdom first list without issuing equity and then issue equity shortly thereafter. We argue that this two-stage offering strategy is less costly than an IPO because trading reduces the valuation uncertainty of these firms before they issue equity. We find that initial return is 10% to 30% lower for these firms than for comparable IPOs, and we provide evidence that the market in the firm's shares lowers financing costs. We also show that these firms time the market both when they list and when they issue equity.

Abstract:
Contrary to concerns about the equity research analysis industry's perceived decline, we find that both the amount of coverage and the precision of earnings estimates have increased over the past twenty-four years. We also study how the stock market behaves around changes in analyst coverage. We find that firms added (dropped) by analysts have positive (negative) contemporaneous abnormal returns and zero (positive) future abnormal returns. Evidence on the bias of cash flow expectations and divergence of opinions suggests a mispricing rather than a fundamentals explanation. Moreover, the abnormal returns are captured by individuals rather than institutions and are compensation to individuals for holding illiquid stocks.

Abstract:
We study the extent to which investor sentiment matters for aggregate equity issuance activity. We focus on firms that are susceptible to investor sentiment and for which accurate measures of economic fundamentals are available. While sentiment on its own matters for equity issuance, it matters relatively little once we control for accurately measured fundamentals. Collectively, proxies for sentiment explain roughly 10 percentage points of the time-series variation of equity issuance beyond the roughly 40 percent explained by fundamentals. We conclude that investor sentiment does not seem to matter very much for aggregate equity issuance activity.

Initial public offerings, hot issue markets, fundamentals, investor sentiment

Abstract:
Merton (1987) argues that, if information is costly, a firm that decreases the information costs of investors can increase its investor recognition and thereby increase its value. I study a key decision that allows a firm to influence its investor recognition, namely, the initial public offering. By selling a larger number of underpriced shares, pre-IPO shareholders can decrease the information costs of IPO investors, increase investor recognition, and thereby increase the value of the shares that they retain after the IPO. My results show that greater compensation for information costs from pre-IPO shareholders to IPO investors is associated with a permanent increase in investor recognition and firm value.

Initial public offerings, information costs, investor recognition, value

Abstract:
When an analyst changes his recommendation of a stock, his valuation differs from the market's valuation based on differences in earnings estimates and/or discount rate estimates. We argue that earnings-based recommendation changes are characterized by hard information, greater verifiability, and shorter forecast horizons compared to discount rate-based recommendation changes. Therefore, earnings-based recommendation changes are less subject to analysts' cognitive and incentive biases and thus they are more informative than discount rate-based recommendation changes. Consistent with this argument, we find that investors differentiate between earnings-based and discount rate-based recommendation changes. Both the initial market reaction to and the drift after recommendation changes are twice as big for earnings-based versus discount rate-based recommendation changes. Trading on earnings-based recommendation changes earns risk-adjusted returns of over three percent per month.

analysts, brokers, recommendations, earnings, growth rates, discount rates, information, market efficiency

Abstract:
This paper looks at the effect of shareholder horizon on corporate behavior. In perfect capital markets, corporate behavior should be insensitive to shareholder horizon, but when investment opportunities are not well valued by the market, shareholder horizon matters. We first present a simple framework to show that shareholder horizon should be looked at in conjunction with stock misvaluation. We build on this insight to design a novel empirical strategy to assess the impact of investor short-termism. Consistent with our simple framework, we find that, when a firm is undervalued, the presence of more short-term investors is associated with bigger shareholder payout, less equity issue, less external financing, and as a result, less investment and less R&D spending. Under our interpretation, long-term investors are not more involved in corporate governance, yet, they affect corporate policy.

Investor Horizon, Payouts, Financing, Investment