Market returns before the offer price is set affect the amount and variability of initial public offering (IPO) underpricing. Thus an important question is "What IPO procedure is best adapted for controlling underpricing in "hot" versus "cold" market conditions?" The French stock market offers a unique arena for empirical research on this topic, since three substantially different issuing mechanisms (auctions, bookbuilding, and fixed price) are used there. Using 1992-1998 data, we find that the auction mechanism is associated with less underpricing and lower variance of underpricing. We show that the auction procedure's ability to incorporate more information from recent market conditions into the IPO price is an important reason.

An emerging literature looking at self-selected, corporate news events concludes that markets appear to underreact to news. Recent theoretical articles have explored why or how underreaction might occur. However, the notion of underreaction is contentious. We revisit this issue by focusing on one of the most simple of corporate transactions, the stock split. Prior studies that report abnormal return drifts subsequent to splits do not appear to be spurious, nor a consequence of misspecified benchmarks. Using recent cases, we report a drift of 9% in the year following a split announcement. We consider fundamental operating performance as a source of the underreaction and find that splitting firms have an unusually low propensity to experience a contraction in future earnings. Further, analysts' earnings forecasts are comparatively low at the time of the split announcement and revise sluggishly over time. Together these results are consistent with the notion of market under reaction to the information in corporate news events.

An emerging literature looking at self-selected, corporate news events concludes that markets appear to underreact to news. Recent theoretical articles have explored why or how underreaction might occur. However, the notion of underreaction is contentious. We revisit this issue by focusing on one of the most simple of corporate transactions, the stock split. Prior studies that report abnormal return drifts subsequent to splits do not appear to be spurious, nor a consequence of misspecified benchmarks. Using recent cases, we report a drift of 9% in the year following a split announcement. We consider fundamental operating performance as a source of the underreaction and find that splitting firms have an unusually low propensity to experience a contraction in future earnings. Further, analysts’ earnings forecasts are comparatively low at the time of the split announcement and revise sluggishly over time. Together these results are consistent with the notion of market underreaction to the information in corporate news events.

This paper develops a closed-form option valuation formula for a spot asset whose variance follows a GARCH (p, q) process that can be correlated with the returns of the spot asset. It provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables. The single lag version of this model contains Heston's (1993) stochastic volatility model as a continuous-time limit. Empirical analysis on S&P500 index options shows that the out-of-sample valuation errors from the single lag version of the GARCH model are substantially lower than the ad hoc Black-Scholes model of Dumas, Fleming and Whaley (1998) that uses a separate implied volatility for each option to fit to the smirk/smile in implied volatilties. The GARCH model remains superior even though the parameters of the GARCH model are held constant and volatility is filtered from the history of asset prices while the ad hoc Black-Scholes model is updated every period. The improvement is largely due to the ability of the GARCH model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility.

[Brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public. We show that stocks that under-writer analysts recommend perform more poorly than "buy" recommendations by unaffiliated brokers prior to, at the time of, and subsequent to the recommendation date. We conclude that the recommendations by underwriter analysts show significant evidence of bias. We show also that the market does not recognize the full extent of this bias. The results suggest a potential conflict of interest inherent in the different functions that investment bankers perform.]

[While most takeover models assume atomistic stockholders, we analyze a single-raider model with finitely many stockholders. Because the raider can always make some stockholders pivotal, he can overcome the free-rider problem identified by Grossman and Hart (1980) and others in atomistic-stockholder models and profitably take over even without exclusion. One might expect that it would be harder for the raider to make stockholders of more widely held firms pivotal and that exclusion would thus become necessary; however, the infinite-stockholder game cannot yield this conclusion. We also consider the limit of the finite-stockholder game and give conditions under which exclusion is unnecessary. Finally, we show that exclusion leads to the possibility of inefficient takeovers.]

We provide evidence that higher-quality disclosure standards are associated with stock returns that are less sensitive to noise driven by investors' moods. We identify return-mood sensitivity (RMS) based on the association between index returns and urban cloudiness, a source of short-term variation in mood. Based on a stylized model, we predict and find evidence consistent with higher-quality disclosure standards reducing RMS by tilting susceptible investors' trades toward information and by facilitating sophisticated investors' arbitrage. Our findings suggest that disclosure standards play an important role in enhancing price efficiency by reducing noise in returns, particularly noise related to investors' short-term moods.

[We use daily short-selling data to examine whether short selling around seasoned equity offerings (SEOs) reflects informed or manipulative trading. Around SEO announcements, we find no evidence of informed short selling. Around issue dates, higher levels of preissue short selling are significantly related to larger issue discounts for non-shelf-registered offerings. This evidence is consistent with manipulative trading. We show that SEC Rule 105 constrains some but not all manipulative trading. Our results reverse previous research that uses monthly short-interest data, because daily data allow more powerful tests. Our evidence helps explain the increased popularity of shelf registrations. Although short selling usually enhances price efficiency, we document a situation where short selling reduces price efficiency.]

[This paper studies the financing role of leasing and secured lending. We argue that the benefit of leasing is that repossession of a leased asset is easier than foreclosure on the collateral of a secured loan, which implies that leasing has higher debt capacity than secured lending. However, leasing involves agency costs due to the separation of ownership and control. More financially constrained firms value the additional debt capacity more and hence lease more of their capital than less constrained firms. We provide empirical evidence consistent with this prediction. Our theory is consistent with the explanation of leasing by practitioners, namely that leasing "preserves capital," which the academic literature considers a fallacy.]

[We provide new evidence on termination provisions and the takeover bidding process. Our central contribution is a novel database from Securities and Exchange Commission (SEC) documents that accurately measures the incidence of termination provisions and the depth of competition in takeover deals. We show that biased data in prior research produced incorrect conclusions on the relation between termination provisions and judicial decisions, bidder toeholds, and deal size. Our comprehensive data also show that termination provisions are positively related to takeover competition. Our evidence is consistent with the information/commitment hypothesis in which termination provisions do not truncate bidding but instead culminate the takeover process.]