January saw three members of the HEC Paris Finance department rewarded for their academic contributions.

Investigating IPOs

François Derrien received the Banque Privée Espirito Santo and Swiss Finance Institute research awards for best finance paper for his article, “Auctioned IPOs: the US evidence”, co-authored with François Degeorge of the Swiss Finance Institute at the University of Lugano and Kent Womack from the Tuck School of Business at Dartmouth. This paper will appear in the Journal of Financial Economics.

Derrien’s research into the initial public offerings (IPOs) of US companies considered the different ways prices are set. “There are two mechanisms: book building, which involves informal communication between banks and investors, and the standard auction, where investors state a price,” he explains.

Book building has been criticized as giving too much power to banks, but conclusive data is rarely available. “What makes our paper interesting is that we acquired data on all 19 auctions held by financial services firm WR Hambrecht,” Derrien explains. “This enabled us to analyze how the auctions work in practice.” The results show that auctions are a credible alternative to book building: they attract a lot of investor participation, particularly from institutional investors, and they lead to IPO prices that reflect the information held by market participants.

Tracing the effects of deregulation

Thierry Foucault received the Europlace Institute of Finance (EIF) award for best finance paper for two articles published in 2008. The first, “Stock price informativeness, cross-listings and investment decisions”, written with Thomas Gehrig of Freiburg University, was published in the Journal of Financial Economics. The second, “Competition for order flow and smart order routing systems”, co-authored with Albert Menkveld from Vrije Universiteit, appeared in the Journal of Finance.

Both papers explore fundamental shifts in financial markets due to deregulation in Europe and the US. The first looks at how markets are competing to attract companies to their “multi-site” listings, and the potentially positive effect this can have on companies’ value. “We considered the question from a different angle to traditional studies, looking at how the politics of investing in a company were affected by cross-listings,” he explains.

The second paper considers whether market fragmentation affects overall liquidity, using the example of the launch of the EuroSET platform by the London Stock Exchange. “There have been very few studies of this kind,” Foucault notes. “The results show that, contrary to popular belief, fragmentation has a positive effect on liquidity.”

Celebrating excellence

On February 19, a breakfast was held for VIPs, business executives and members of the press to honor Derrien, Foucault and Laurent Frésard, who received the Law & Economics Consulting Group (LECG) Prize for his article, “Financial strength and product market behavior: the real effects of corporate cash holdings.” The article, which will appear in the Journal of Finance, looked into how firms strategically develop their cash reserves to gain market share. According to Frésard, “The award confirmed that people are taking a real interest in this issue, and that the paper enhances our understanding of the multifaceted interactions between corporate strategy and finance.”

For Derrien, Foucault and Frésard, the awards represent a validation by the industry and their peers. “It’s great to be acknowledged in this way,” Derrien says. “It shows that what we are doing is valuable, and that the profession is taking a real interest in our work.”