Evidence of Information Spillovers in the Production of Investment Banking Services (with Lawrence Benveniste, Alexander Ljungqvist and William Wilhelm), 2003, Journal of Finance 58, 577-608.
We provide evidence that firms attempting IPOs condition offer terms and the decision whether to carry through with an offering on the experience of their primary market contemporaries. Moreover, 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. Our findings are consistent with investment banks implicitly bundling offerings subject to a common valuation factor to achieve more equitable internalization of information production costs and thereby preventing coordination failures in primary equity markets.
Investment Opportunities, Liquidity Premium, and Conglomerate Mergers (with Chun Chang), 2004, Journal of Business 77, 45-74.
In this article we show that in a finitely liquid market with asymmetrically informed investors, both the benefits and the costs of diversification vary with the return and risk of the investment opportunities of the firm's divisions. The benefits come from a reduced liquidity discount in the stock price of the merged firm when its shareholders anticipate less informed trading. The costs are the result of less efficient investment by the merged firm's divisions due to a less informative stock price. Our results provide explanations for the life cycle of diversification strategies and implications for evaluating merger and spin-off candidates.
The Role of the Media in the Launch of Internet IPOs (with Utpal Bhattacharya, Neal Galpin and Rina Ray), 2006, Betriebswirtschaftliche Forschung und Praxis 58, 442-456.
We document that there was media hype about internet stocks during the bubble. However, the media hype about internet stocks during the bubble was discounted: though the media coverage positively affected pre-IPO value revisions, it affected internet IPOs more than non-internet IPOs only after the bubble burst. Further, though the pre-IPO media coverage positively affected first-day returns only after the bubble burst, the effect on the internet IPOs was the same as the effect on the non-internet IPOs. This suggests that the media affect prices more in primary markets than in secondary markets. In both cases, the impact of the media is higher during bust times than during boom times.
The Causes and Consequences of Recent Financial Market Bubbles: An Introduction (with Utpal Bhattacharya), 2008, Review of Financial Studies 21, 3-10.
On the Anticipation of IPO Underpricing: Evidence from Equity Carve-outs (with Lawrence Benveniste, Huijing Fu and Paul Seguin), 2008, Journal of Corporate Finance 14, 612-629.
We investigate IPO market efficiency using a sample of equity carve-outs offered during the period of 1985-2005. Unlike IPOs examined in previous studies where trading during the pre-IPO book-building period does not exist and trading on the IPO date is rationed, in equity carve-outs, investors can trade in the non-rationed market for shares of the parent, which holds a significant fraction of the subsidiary. We find that the subsidiary’s initial day return is significantly related to its parent’s return over the book-building period, but unrelated to its parent’s contemporaneous return. Neither the pre-IPO price revision of the subsidiary nor the return to the parent on the initial trading day can be predicted. While the portion of the subsidiary’s initial return unpredictable from information available during the book-building period is significantly related to its parent’s contemporaneous return, the predictable component of the initial return is not. We interpret these results as evidence consistent with market efficiency.
We read all news items that came out between 1996 through 2000 on all 458 internet IPOs and a matching sample of 458 non-internet IPOs – a total of 171,488 news items – and classify each news item as good news, neutral news or bad news. We first document that the media was more positive for internet IPOs in the period of the dramatic rise in share prices, and was more negative for internet IPOs in the period of the dramatic fall in share prices. We then document that this media hype is unable to explain the internet bubble: there was a 1646% difference in returns between the two groups from January 1, 1997 through March 24, 2000 (the market peak), and the media can explain only 2.9% of that.
Corporate Fraud and Business Conditions: Evidence from IPOs (with Tracy Wang and Andrew Winton), 2010, Journal of Finance 65, 2255‐2292.
We examine how a firm’s incentive to commit fraud when going public varies with investor beliefs about industry business conditions. Fraud propensity increases with the level of investor beliefs about industry prospects but decreases in the presence of extremely high beliefs. Evidence suggests that two mechanisms are at work: monitoring by investors, and short-term executive compensation, both of which vary with investor beliefs about industry prospects. We also find evidence that monitoring incentives of investors and underwriters differ. Our results are consistent with the predictions of recent models of investor beliefs and corporate fraud, and suggest that regulators and auditors should be especially vigilant for fraud during booms.
Informational Efficiency and Liquidity Premium as the Determinants of Capital Structure (with Chun Chang), 2010, Journal of Financial and Quantitative Analysis 45, 401-440.
This paper investigates how a firm's capital structure choice affects the informational efficiency of its security prices in the secondary markets. We identify two new determinants of a firm's capital structure policy: liquidity (adverse selection) premium due to investors' anticipated losses to informed trading, and operating efficiency improvement due to information revelation from the firm's security prices. We show that capital structure decision affects traders' incentives to acquire information and subsequently, the distribution of informed traders across debt and equity claims. When information is less imperative for improving its operating decisions, a firm issues zero or negative debt (i.e., holding excess cash reserves) in order to reduce socially wasteful information acquisition and the liquidity premium associated with it. When information is crucial for a firm's operating decisions, the optimal debt level is one which achieves maximum information revelation at the lowest possible liquidity cost. Our model can explain why many firms consistently hold no debt. It also provides new implications for financial system design and for the relationship among leverage, liquidity premium, profitability, and the cost of information acquisition.
This paper examines the relation between corporate lobbying and fraud detection. Using data on corporate lobbying expenses between 1998 and 2004, and a sample of large frauds detected during the same period, we find that firms’ lobbying activities make a significant difference in fraud detection: compared to non-lobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.
We construct a mortality table for U.S. public companies during 1985–2006. We find that firms' age-specific mortality rates initially increase, peaking at age three, and then decrease with age, implying that the first three years of public life are critical. Financial intermediaries involved around the public birth of a firm—venture capitalists (VCs) and high-quality underwriters—are associated with lower firm mortality rates, sometimes for up to seven years after the IPO. VCs reduce mortality rates more through natal financial care than through selection, whereas high-quality underwriters affect firm mortality more through selection.
Information from Relationship Lending: Evidence from China (with Chun Chang, Guanmin Liao and Zheng Ni), 2013, Journal of Money, Credit and Banking forthcoming.
Using a proprietary database from one of the largest state-owned commercial banks in China, we examine whether information evolved from banking relationships helps to predict loan default by industrial firms. We find that the bank’s relationship information is significantly linked to the incidence of default, and that the overall improvement in prediction accuracy due to this information is much larger than that due to any hard information. When evaluating loan delinquency, the economic effect of relationship information is significantly stronger among firms that have a more sustained banking relationship. Our findings indicate that, at least in the emerging markets, a bank’s relationship information still matters for large firms, despite the fact that hard information for such firms is abundant.
Relationship between Social Security in China and the Development of the Capital Markets (with Chun Chang), 1999, in Social Security Reform in China, Dianqing Xu, Zunsheng Yin, and Yuxin Zheng ed., Economic Science Press, Beijing, China.
Market Microstructure (in Chinese), 2011, in D., Ke, H. Li, and S. Lu, ed., Volume of Finance, Frontiers of Western Research in the Humanities and Social Sciences, Renda Press, Beijing, China.
IPOs and SEOs (in Chinese, with Dan Xu), 2011, in D., Ke, H. Li, and S. Lu, ed., Volume of Finance, Frontiers of Western Research in the Humanities and Social Sciences, Renda Press, Beijing, China.