We examine Japan's 1997 introduction of book building as an alternative to a previously required hybrid auction method. Despite higher cost for some issuers, all issuers in Japan now select book building. Book building enables more accurate valuation of firms, but gains from accurate valuation are partly redistributive. Thus book building can drive auction-method offerings from the market even if it yields no aggregate benefit. Compared to the auction regime, book building reduces issue costs for large issuers. Auctioning is less costly for small issuers, but appears to foreclose some small firms from issuing. The aggregate costs of book building and auctioning are similar.

A method is presented for generating test statistics that share the same first order asymptotic optimality properties of the classical statistics. Generalizing J. Neyman's work (1959), t he linearized classical statistic tests restrictions in implicit func tion form using a parameter estimator that is consistent and symptoti cally normally distributed under the alternative hypothesis. By judic ious choice of estimator and form of restrictions at which to evalua te the statistic, a class of asymptotically optimal statistics is obt ained, among which are numbered some familiar classical statistics. A n application is presented for testing common factor restrictions in a single equation dynamic regression model with moving average distu rbances.

[We use a sample of 8,163 venture-backed companies over three decades to test the competing hypotheses that levels and relative shares of IPO (initial public offering) and M&A (mergers and acquisitions) exits are affected by market timing, versus pseudo-market timing that reflects market conditions. We find evidence of pseudo-market timing. Venture-backed issuers react to market or sector runups but do not predict downturns. We find no evidence that firm-specific market timing contributes to IPO or M&A waves. We also find that acquirers turn to acquisition when other opportunities are unattractive, and that the market may be slow to recognize that such opportunities are declining.]

Non-nested tests are proposed for competing models estimated by generalized method of moments. Results are presented for non-nested linear regression models with het- eroskedasticity and serial correlation of unknown form and differing instrument validity assumptions. Regression forms of the statistics are also presented. THIS PAPER IS CONCERNED with providing a procedure whereby non-nested models estimated by generalized method of moments (GMM) (Hansen (1982)) may be com- pared. In particular, Cox-type (Cox (1961, 1962)) and encompassing tests (Mizon and Richard (1986)) are proposed. Implicit in such tests is a degree of arbitrariness in the way the statistics are constructed as, typically, the assumptions underlying GMM estima- tion techniques are minimal and do not fully specify the data generation process (DGP) underlying the observable random variables, in contradistinction to the method of maximum likelihood. Our procedures allow the population moment conditions on which GMM estimation of the competing models is based to differ in the conditioning sets under which conditional expectation is taken; such differences may reflect different a priori assumptions concerning the exogeneity status of random variables in the models. These tests may be regarded as generalizations of Singleton (1985). More recent work includes Ghysels and Hall (1990) which requires the specification of the DGP under the null hypothesis and Wooldridge (1990b) which proposes heteroskedasticity-robust tests for non-nested non-linear regression models. Our results are specialized to provide non-nested tests for competing regression models estimated by instrumental variables, where we allow a degree of heteroskedastic- ity and serial correlation in the process generating the disturbance terms, by assuming appropriate mixing conditions (White (1984)), and the instrument validity assumptions to differ across the models; cf. Godfrey (1983, 1984) which assume a scalar covariance matrix for the disturbances and that the set of instruments is valid in both models. Thus, our framework includes models which may be both simultaneous and dynamic. Section 2 describes procedures for obtaining Cox-type and encompassing tests for competing models estimated by GMM. Section 3 specializes these results to competing linear regression models estimated by instrumental variables; regression forms for the statistics are presented. The paper is concluded by Section 4. In our presentation, we eschew detailed regularity assumptions.

The issuer's decision to include warrants as compensation to underwriters is studied for a sample of 1,991 negotiated firm commitment issues of seasoned equity. Using a two-stage logit model to correct for self-selection bias, the authors find direct evidence that warrant compensation functions as a bond, substituting for reputational capital and enabling the underwriter to certify the issue price. To a lesser degree, the decision also is affected by regulations on underwriter compensation and on the use of underwriter warrants. Issuers' decisions are consistent with an objective of minimizing total underwriting cost, including cash compensation, warrants, and underpricing.

Despite selling at substantial discounts, private placements of equity are associated with positive abnormal returns. The authors find evidence that discounts reflect information costs borne by private investors and abnormal returns reflect favorable information about firm value. Results are consistent with the role of private placements as a solution to the Myers and Majluf (1984) underinvestment problem and with the use of private placements to signal undervaluation. The authors also find some evidence of anticipated monitoring benefits from private sales of equity. For the smaller firms that comprise their sample, information effects appear to be relatively more important than ownership effects.

Data on selling by venture capitalists during the IPOs of their portfolio companies are used to examine the relation between insider selling decisions and reputation. We hypothesize that, in deciding whether to sell, venture capitalists balance the costs of continued managerial/monitoring involvement against the adverse reaction to selling. Further, they facilitate unwinding of investment positions by developing reputations for not selling overpriced shares. Evidence on the timing of IPOs and selling decisions of venture capitalists confirms the importance of reputation as a determinant of the organization of the venture capital market and as a factor affecting insider selling decisions.

James R. Booth, Richard L. Smith, II, The Application of Errors-In-Variables Methodology to Capital Market Research: Evidence on the Small-Firm Effect, The Journal of Financial and Quantitative Analysis, Vol. 20, No. 4 (Dec., 1985), pp. 501-515

Previous research suggests that firms choose negotiated issuance over competitive despite its apparently higher net interest cost. This result is shown to arise partly from failure to correct for a selectivity bias in the choice of issuance procedures. Two stage analysis is used in a model that includes qualitative and limited dependent variables to re‐estimate the net interest cost difference between competitive and negotiated issues. Results support the hypothesis that the choice of issuance procedure is consistent with shareholder wealth maximization. Examination of debt issues subject to Rule 50 of the Public Utility Holding Company Act indicates that the regulation, as applied, is not effective.

Previous research suggests that firms choose negotiated issuance over competitive despite its apparently higher net interest cost. This result is shown to arise partly from failure to correct for a selectivity bias in the choice of issuance procedures. Two stage analysis is used in a model that includes qualitative and limited dependent variables to re-estimate the net interest cost difference between competitive and negotiated issues. Results support the hypothesis that the choice of issuance procedure is consistent with shareholder wealth maximization. Examination of debt issues subject to Rule 50 of the Public Utility Holding Company Act indicates that the regulation, as applied, is not effective.