Analyst Hype in IPOs: Explaining the Popularity of Bookbuilding

F. Degeorge, F. DERRIEN, K. Womack

Review of Financial Studies

juillet 2007, vol. 20, n°4, pp.1021-1058

Départements : Finance, GREGHEC (CNRS)

The bookbuilding IPO procedure has captured significant market share from auction alternatives recently, despite the significantly lower costs related to the auction mechanism. In France, where both mechanisms were used in the 1990s, the ostensible advantages of bookbuilding were advertising-related benefits. Book-built issues were more likely to be followed and positively recommended by lead underwriters. Even nonunderwriters' analysts promote book-built issues more in order to curry favor with the IPO underwriter for allocations of future deals. Yet we do not observe valuation or post-IPO return differentials that suggest these types of promotion have any value to the issuing firm.

Banking deregulation and Industry Structure: Evidence From the French Banking Act of 1985

M. Bertrand, A. Schoar, D. THESMAR

The Journal of Finance

avril 2007, vol. 62, n°2, pp.597-628

Départements : Finance, GREGHEC (CNRS)

We investigate how the deregulation of the French banking industry in the 1980s affected the real behavior of firms and the structure and dynamics of product markets. Following deregulation, banks are less willing to bail out poorly performing firms and firms in the more bank-dependent sectors are more likely to undertake restructuring activities. At the industry level, we observe an increase in asset and job reallocation, an improvement in allocative efficiency across firms, and a decline in concentration. Overall, these findings support the view that a more efficient banking sector helps foster a Schumpeterian process of “creative destruction.”

Consolidation et Fragmentation des Marchés Financiers: Coûts et Bénéfices


La Documentation Française

août 2007, vol. 67, pp.103-128

Départements : Finance, GREGHEC (CNRS)

Does anonymity matter in electronic limit order markets ?

T. FOUCAULT, S. Moinas, E. Theissen

Review of Financial Studies

septembre 2007, vol. 20, n°5, pp.1707-1747

Départements : Finance, GREGHEC (CNRS)

We develop a model in which limit order traders possess volatility information. We show that in this case the size of the bid'ask spread is informative about future volatility. Moreover, if volatility information is in part private, we establish that (i) the size of the bid'ask spread and (ii) its informativeness about future volatility should change in the same direction when limit order traders' identifiers stop being disclosed. We test these predictions using data from the Paris Bourse. As expected, we find that the average quoted spread and its informativeness are significantly smaller when limit order traders' identifiers are concealed. These findings suggest that the limit order book is a channel for volatility information

Down or out: Assessing the welfare costs of household investment mistakes

L. E. CALVET, J. Campbell, P. Sodini

Journal of Political Economy

octobre 2007, vol. 115

Départements : Finance, GREGHEC (CNRS)

This paper investigates the efficiency of household investment decisions in a unique dataset containing the disaggregated wealth and income of the entire population of Sweden. The analysis focuses on two main sources of inefficiency in the financial portfolio: underdiversification of risky assets ("down") and nonparticipation in risky asset markets ("out"). We find that while a few households are very poorly diversified, the cost of diversification mistakes is quite modest for most of the population. For instance, a majority of participating Swedish households are sufficiently diversified internationally to outperform the Sharpe ratio of their domestic stock market. We document that households with greater financial sophistication tend to invest more efficiently but also more aggressively, so the welfare cost of portfolio inefficiency tends to be greater for these households. The welfare cost of nonparticipation is smaller by almost one half when we take account of the fact that nonparticipants would be unlikely to invest efficiently if they participated in risky asset markets Keywords: Asset allocation, diversification, familiarity, participation

Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications


Review of Economic Studies

avril 2007, vol. 74, n°2, pp.345-390

Départements : Finance

An entrepreneur with limited liability needs to finance an infinite horizon investment project. An agency problem arises because she can divert operating cash flows before reporting them to the financiers. We first study the optimal contract in discrete time. This contract can be implemented by cash reserves,debt, and equity. The latter is split between the financiers and the entrepreneur and pays dividends when retained earnings reach a threshold. To provide appropriate incentives to the entrepreneur, the firm is downsized when it runs short of cash. We then study the continuous-time limit of the model. We provethe convergence of the discrete-time value functions and optimal contracts. Our analysis yields rich implications for the dynamics of security prices. Stock prices follow a diffusion reflected at the dividend barrier and absorbed at 0. Their volatility, as well as the leverage ratio of the firm, increase after badperformance. Stock prices and book-to-market ratios are in a non-monotonic relationship. A more severe agency problem entails lower price-earning ratios and firm liquidity and higher default risk

From Flexibility to Insecurity: How Vertical Separation Amplifies Firm Level Uncertainty

D. THESMAR, M. Thoenig

Journal of the European Economic Association

décembre 2007, vol. 5, n°6

Départements : Finance, GREGHEC (CNRS)

This article presents a model where firms may endogenously externalize part of their production process. We start from the premise that adaptation to uncertainty cannot be contracted upon in the worker/employer relationship. Vertical separation then balances flexibility gains against hold-up costs of opportunistic behavior by outside contractors. In equilibrium, the degree of separation is shown to depend on the degree of product market competition, contractor's bargaining power, and the volatility of demand shocks. Our main result is that an increase in the degree of vertical separation amplifies the elasticity to demand shocks of firms' sales and employment. It does not, however, amplify aggregate uncertainty. Evidence from firm-level data is shown to be largely consistent with the main implications of our theory

How does the allocation of credit select between boundedly rational firms?


Journal of the European Economic Association

avril-mai 2007, vol. 5, n°2-3, pp.411-419

Départements : Finance

I study how savers allocate funds between boundedly rational firms which follow simple pricing rules. Firms need cash to pay their inputs in advance, and savers-shareholders allocate cash between them so as to maximize their rate of return. When the rate of return on each firm is observed, there are multiple equilibria, and some degree of monopoly power is sustained. However, the economy gets close to the Walrasian equilibrium when the availability of funds goes to infinity. Multiple equilibria also arise when there are "entrants" with unobservable rates of return. In an equilibrium where entrants are not funded, savers invest in incumbents because those entrants which will divert customers from incumbents are likely to be excess underpricers.

Making sense of Bolkestein bashing: trade liberalization under segmented labor markets


Journal of International Economics

septembre 2007, vol. 73, n°1, pp.152-174

Départements : Finance

An increase in the range of tradable goods is analyzed in a two-country Dornbusch'Fischer'Samuelson style model, where labor cannot relocate to another sector upon a non-expected increase in the range of goods that can be traded.The effect of liberalization on the terms of trade tend to favor the poorer country (the 'East'), if (as assumed) the most sophisticated goods are tradable before reform. Second, under ex-post liberalization, there exists a class of workers in the West who are harmed because they face competition from Eastern workers and cannot relocate to other activities. But if the East's economy is relatively small, their wage losses are not very large. Things are different, however, if there exist asymmetries in labor market institutions, such that upon reform, labor can relocate in the East but not in the West. Some workers in the West can then experience very large wage losses. Thus, rigid labor markets in the West magnify opposition to reform there. Keywords: Trade liberalization; European integration; Bolkestein directive; Labor mobility; Labor market institutions; Comparative advantage; Terms of trade

Multifrequency News and Stock Returns

L. E. CALVET, J. Fisher

Journal of Financial Economics

octobre 2007, vol. 86, n°1, pp.178-212

Départements : Finance, GREGHEC (CNRS)

This paper develops a parsimonious asset-pricing economy with multifrequency regime-shifts in dividend volatility. We estimate on daily U.S. equity returns tightly parameterized specifications with up to eight different persistence levels and over 250 discrete states. The likelihood improves as frequencies are added, and all versions with three or more components improve on the classic Campbell and Hentschel (1992) specification, while generating volatility feedback effects between 6 and 12 times larger. We extend the model to incorporate investor learning, and identify an endogenous tradeoff between skewness and kurtosis as information quality changes. Economies with intermediate levels of information best match the data*EQUILIBRIUM (Economics)*HEDGING (Finance)*RATIONAL expectations (Economic theory)*SECURITIES -- Prices*VOLATILITY*SECURITIES marketsAuthor-Supplied Keywords:LearningG12C22Volatility feedback