Knowledge that Transforms

In uniform auctions, buyers chosse demand schedules as strategies and the same "market clearing" price for units awarded. Despite the widespread use of these auctions, the extant theory shows that they are susceptible to arbitrarily large underpricing. We make a realistic modification to the theory by letting prices, quantities, and bids be discrete. We show that underpricing can be made arbitrarily small by choosing a sufficiently small price tick size and a sufficiently large quantitity multiple. We also show how one might improve revenues by modifying the allocation rule. A trivial change in the design can have a dramatic impact on prices. Our conclusions are robust to bidders being capacity constrained. Finally, we examine supply uncertainty robust equilibria.

This article develops a theory of multiunit auctions where short squeezes can occur in the secondary market. Both uniform and discriminatory auctions are studied and bidders can submit multiple bids. We show that bidders with short and long preauction positions have different valuations in an otherwise common value setting. Discriminatory auctions lead to more short squeezing and higher revenue than uniform auctions, ceteris paribus. Asymptotically, as the auction size approaches infinity, the two formats lead to equivalent outcomes. Shorts employ more aggressive equilibrium bidding strategies. Most longs strategically choose to be passive. Free riding on a squeeze by small, long players has no impact on these results, but affects revenue in discriminatory auctions.

We study transactions of voting rights. In our sample of 67 dual class unifications superior vote shareholders give up their superior voting status (all firm stocks become "one share one vote"), and receive (in most cases) compensation in the form of additional stocks. Based on the compensation granted, the median price of 1% of the vote is about 0.1% of firm's equity. More interestingly, the price of vote decreases with institutional holdings, and increases with the percentage vote lost by the majority shareholders. The position and interests of the majority holders appear as the main determinants of the price of vote. * School of Management, Ben-Gurion University of the Negev, Beer-Sheva, Israel, and Chief Economist, Israel Securities Authority, Jerusalem 95464, Israel. ** Corresponding Author: The Anderson School at UCLA, 110 Westwood Plaza, Los Angeles CA 90095, USA; and School of Business Administration, Bar-Ilan University, Ramat Gan 52900, Israel. Fax: 310-2065455; e-mail: ...

Title Index Get access The Review of Financial Studies, Volume 17, Issue 4, October 2004, Pages 1219–1221, https://doi.org/10.1093/rfs/hhh013 Published: 01 October 2004

This article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries. In the model, investors have a generic lending technology that they can improve at a cost. Those who upgrade become intermediaries to exploit their advantage. However, conflicts with depositors will limit the banks' market presence, and they will only lend to moderately endowed firms while bondholders will finance cash-rich corporations. The article also analyzes the extent to which investors adopt the superior lending technique, the nature of bank competition, and how corporate and bank conditions affect interest rates and investment. Copyright 2004, Oxford University Press.

We use a moral hazard model to compare monitored (nontraded) bank loans and traded (nonmonitored) bonds as sources of external funds for industry. We contrast the theoretical conditions that favor each system with the historical conditions prevailing when these financial systems evolved during the British and German industrial revolutions. To study persistence, we consider an entry model where financiers take the industrial structure as given when they lend and firms take the financial system as given when they borrow. We show multiple equilibria can exist, compare equilibria in welfare terms, and discuss their robustness to coordination between lenders and borrowers.

We investigate resource allocation decisions in conglomerates when managers are motivated by career concerns. When divisional cash flows are differentially informative about managerial ability, we show that it is in the managers' interest to overallocate unobservable intangible resources to the more informative divisions. Anticipating this bias, it is optimal for the firm's owners to also overallocate observable capital to the more informative divisions. The model provides rationale for corporate socialism and corporate hedging. It also highlights a cost of segment reporting and tracking stocks, namely, that they allow managers to distort their perceived ability at the expense of investors. Copyright 2004, Oxford University Press.

This article studies equilibrium asset pricing when agents face nonnegative wealth constraints. In the presence of these constraints it is shown that options on the market portfolio are nonredundant securities and the economy's pricing kernel is a function of both the market portfolio and the nonredundant options. This implies that the options should be useful for explaining risky asset returns. To test the theory, a model is derived in which the expected excess return on any risky asset is linearly related (via a collection of betas) to the expected excess return on the market portfolio and to the expected excess returns on the nonredundant options. The empirical results indicate that the returns on traded index options are relevant for explaining the returns on risky asset portfolios.

We develop a preference-based equilibrium asset pricing model that explains low-frequency conditional volatility. Similar to Barberis, Huang, and Santos (2001), agents in our model care about wealth changes, experience loss aversion, and keep a mental scorecard that affects their level of risk aversion. A new feature of our model is that when perturbed by unexpected returns, investors become temporarily more sensitive to news. Gradually investors become accustomed to the new level of wealth, restoring prior levels of risk aversion and news sensitivity. The state-dependent sensitivity to news creates the type of volatility clustering found in low-frequency stock returns. We find empirical support for our model's predictions that relate the scorecard to conditional volatility and skewness.

We study endogenous liquidity trading in a market with long-lived asymmetric information. We distinguish between public information, tractable information that can be acquired, and intractable information that cannot be acquired. Besides information asymmetry and noise, the adverse-selection spread depends on the diffusion of intractable information and on the interest rate. With endogenous liquidity trading, efficiency is lower than that implied by noise-trading models. Liquidity traders benefit from the information released through the insider's trades in spite of their monetary losses. We study factors that affect the insider's information acquisition decision, including the amount of intractable information, observability, and information acquisition costs. Copyright 2004, Oxford University Press.