Divergence of opinion and initial public offerings

The main purpose of this paper is to examine underwriters' response to issuers' ineffective corporate governance. Given the growing importance of corporate governance for the success of equity offerings, we examine this response using a sample of seasoned equity offerings (SEOs). Previous studies suggest various rationales behind underwriter syndication, such as risk sharing, market-making, information production, certification, and monitoring. We offer an information-asymmetry-reduction hypothesis for the persistence of underwriter syndication. We argue that less effective corporate governance decreases information credibility, which, in turn, increases information asymmetry, leading underwriters to increase syndicate size to mitigate subsequent agency problems. Consistent with this prediction, we find that the size of the underwriter syndication is inversely related to proxies that measure the effectiveness of corporate governance. Results remain robust even after controlling for other confounding factors.

Section: Robustness Checkmentioning

confidence: 99%

Underwriter syndication and corporate governance

Kim

Shin

2010

The IPO market as a screening device and the going public decision: evidence from acquisitions of privately and publicly held firms

Mantecon

Thistle

2010

Some owners of private firms who cash out their investments sell their firms all at once. Others sell part of the firm in an initial public offering (IPO), then sell the remainder shortly after the IPO. Using a unique data set from IPO filings we find that the expected payoff to going public before selling the firm is 200 percent higher than selling privately. One explanation for these different valuations is that public markets are more competitive than private markets for corporate assets. An alternative explanation is that the going public process is a screening mechanism; public firms have higher valuations because they are better firms. We test between these two explanations. The results suggest that listing shares in public equity markets enhances the value to owners who want to cash out their investments because the IPO process acts as a screening device of a firm's quality. JEL Classification: G32, G34

New evidence on the effect of belief heterogeneity on stock returns

Hobbs

Lee

Singh

2016

We develop a new measure to examine the effect of the heterogeneity of beliefs among investors on stock returns. Our initial results do not support the information asymmetry hypothesis or the sidelined investor hypothesis (and thus are consistent with the unbiased prices hypothesis). However, since the first two hypotheses make opposite predictions regarding stock returns, they may both have merit but offset one another. Further analysis suggests that this is indeed the case. Overall, our results support both the information asymmetry and sidelined investor hypotheses and thus occupy middle ground in the debate on the effect of disagreement on stock returns.