We review the theory and evidence on IPO activity: why firms go public, why they reward first‐day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from nonrational and agency conflict explanations. We describe some promising such alternatives.

The Internet may significantly reduce search costs by enabling price comparisons on-line. This paper provides empirical evidence on how Internet comparison shopping sites affected the prices of life insurance in the 1990s. With micro data on individual insurance policies and with individual and policy characteristics controlled for, hedonic-type regressions show that increases in Internet use significantly reduced the price of term life insurance. Further evidence shows that prices did not fall with rising Internet usage in the period before the sites began, nor for insurance types that were not covered on the sites. The results suggest that the growth of the Internet has reduced term life prices by 815 percent. The results also show that the initial introduction of the Internet search sites is initially associated with an increase in price dispersion within demographic groups, but as use spreads, the dispersion falls.

Bank of Minneapolis and University of Minnesota. We thank the NSF for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The Great Depression is not yet well understood. Economists have offered many theories for both the massive decline and the slow recovery of output during 1929—39, but no consensus has formed on the main forces behind this major economic event. Here we describe and demonstrate a simple methodology for determining which types of theories are the most promising. Several prominent theories blame the Great Depression on frictions in labor and capital markets. The sticky wage theory is that wage stickiness together with a monetary contraction produces a downturn in output. (See Michael Bordo, Christopher Erceg, and Charles Evans 2001.) The cartelization theory is that an increase in cartelization and unionization leads to a slow recovery. (See Harold Cole and Lee Ohanian 2001.) The investment friction theory is that monetary contractions increase frictions in capital markets that produce investment-driven downturns in output.

We analyze institutional allocation in initial public offerings (IPOs) using a new data set of U.S. offerings between 1997 and 1998. We document a positive relationship between institutional allocation and day one IPO returns. This is partly explained by the practice of giving institutions more shares in IPOs with strong premarket demand, consistent with book‐building theories. However, institutional allocation also contains private information about first‐day IPO returns not reflected in premarket demand and other public information. Our evidence supports book‐building theories of IPO underpricing, but suggests that institutional allocation in underpriced issues is in excess of that explained by book‐building alone.

We use the Ohlson (1995, 1999) and Feltham and Ohlson (1999) valuation models to investigate the market's perception of the economic effect of employee stock options (ESOs) on firm value for a sample of 85 profitable computer software companies. Our results suggest that the market appears to value these firms' ESO expense not as an expense but as an intangible asset (even after controlling for the endogeneity bias arising from the mechanical relation between ESOs and the underlying stock prices). However, we also find a conflict between: (1) the positive manner in which investors appear to value ESO expense, and (2) the negative relation between current ESO expense and future abnormal earnings. This conflict not only could be an artifact of the restrictiveness of the abnormal earnings forecasting equation we estimate, but it also calls into question whether investors assess correctly the effect of ESOs on profitable software firm value.

We study the residential choice of siblings who are altruistic towards their parents. The first-born child’s location choice influences the behavior of the second-born child and can shift some of the burden of providing care for the parents from one child to the other. These strategic considerations lead to an equilibrium location pattern with firstborn children locating further away from their parents than second-born children. We also analyze the location choices empirically using German data. These data confirm our theoretical predictions.