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Contents
The Effect of Transaction Size on Off-the-Run Treasury Prices
David F. Babbel, Craig B. Merrill, Mark F. Meyer, and Meiring de Villiers
Negotiation and the IPO Offer Price: A Comparison of Integer vs. Non-Integer IPOs
Daniel J. Bradley, John W. Cooney, Jr., Bradford D. Jordan, and Ajai K. Singh
Financial Innovation, Market Participation, and Asset Prices
Laurent Calvet, Martín Gonzalez-Eiras, and Paolo Sodini
Economic Sources of Gain in Stock Repurchases
Konan Chan, David Ikenberry, and Inmoo Lee
Optimum Centralized Portfolio Construction with Decentralized Portfolio
Management
Edwin J. Elton and Martin J. Gruber
Limited Stock Market Participation and Asset Prices in a Dynamic
Economy
Hui Guo
Initial Public Offerings in Hot and Cold Markets
Jean Helwege and Nellie Liang
Limited Partnerships and Reputation Formation
Jarl G. Kallberg, Crocker H. Liu, and Anand Srinivasan
Do Indirect Investment Barriers Contribute to Capital Market
Segmentation?
George P. Nishiotis
Why Do IPO Underwriters Allocate Extra Shares when They Expect to Buy Them
Back?
Donghang Zhang
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Abstracts
The Effect of Transaction Size on Off-the-Run
Treasury Prices
David F. Babbel, Craig B. Merrill, Mark F.
Meyer, and Meiring de Villiers This paper examines intra-day
trading data from the inter-dealer broker market for U.S. Treasury
securities and measures the degree of price pressure in the off-the-run
Treasury market. As is well known, securities that would appear to be very
close substitutes, i.e., on-the-run and off-the-run Treasury bonds, behave
as if there is some degree of market segmentation. This is the first
systematic study of the off-the-run Treasury note and bond market focused
entirely on a price pressure effect using intra-day data. The paper
analyzes price pressure through matched pairs of securities that differ
only in liquidity.
Negotiation and the IPO Offer Price: A
Comparison of Integer vs. Non-Integer IPOs
Daniel J. Bradley,
John W. Cooney, Jr., Bradford D. Jordan, and Ajai K. Singh We
investigate the pricing of 4,989 equity IPOs with offer dates between 1981
and 2000. Approximately three-fourths of these IPOs have integer offer
prices. Average initial returns for IPOs with integer offer prices are
significantly higher (24.5%) than those priced on the fraction of the
dollar (8.1%). This result is robust through time and after conditioning
for other effects known to influence initial returns. We hypothesize that
integer vs. fractional dollar IPOs are the result of negotiations between
the issuing firm and underwriter. Under this negotiation hypothesis, the
frequency of integer pricing should be an increasing function of the offer
price and the degree of uncertainty surrounding the value of the firm.
Empirical evidence, supportive of the negotiation hypothesis, is
presented.
Financial Innovation, Market Participation, and Asset Prices
Laurent Calvet, Martín Gonzalez-Eiras, and Paolo Sodini
This paper investigates the pricing effects of financial innovation in an
economy with endogenous participation and heterogeneous income risks. The
introduction of non-redundant assets endogenously modifies the
participation set, reduces the covariance between dividends and
participants' consumption and thus leads to lower risk premia. In
multisector economies, financial innovation spreads across markets through
the diversified portfolio of new entrants, and has rich effects on the
cross-section of expected returns. The price changes can also lead some
investors to leave the markets and give rise to non-degenerate forms of
participation turnover. The model is consistent with several features of
financial markets over the past few decades: substantial innovation,
higher participation, significant turnover in investor composition,
improved risk management practices, a slight increase in real interest
rates, and a reduction in risk premia.
Economic Sources of Gain in Stock Repurchases
Konan Chan, David Ikenberry, and Inmoo Lee
Previous studies offer a mixed understanding of the economic role of stock
repurchases. This paper investigates three key economic
motivations—mispricing, disgorging free cash flow, and increasing
leverage—by evaluating cross-sectional differences in both the
initial market reaction and long-run performance. The initial reaction
provides some support for the mispricing story. However, subsequent
earnings-related information shocks suggest that the initial market
reaction is incomplete and that long-run performance may be informative.
The long-horizon return evidence is most consistent with the mispricing
hypothesis and, to some degree, the free cash flow hypothesis. We find
little support for the leverage hypothesis.
Optimum Centralized Portfolio Construction with Decentralized Portfolio
Management
Edwin J. Elton and Martin J. Gruber
Many financial institutions employ outside portfolio managers to manage part
or all of their investable assets. It is well recognized that outside
portfolio managers are unwilling to share security information with each
other or with the centralized decision maker and this in general will lead
to sub-optimal portfolios. In this paper, we derive an implementable set of
rules under which a central decision maker can make optimal decisions
without requiring decentralized decision makers to reveal estimates of
security returns. Furthermore, we derive conditions under which these rules
hold and when they do not hold.
Limited Stock Market Participation and Asset Prices in a Dynamic
Economy
Hui Guo
This paper presents a consumption-based model that explains the equity
premium puzzle through two channels. First, because of borrowing
constraints, the shareholder cannot completely diversify his income risk
and requires a sizable risk premium on stocks. Second, because of limited
stock market participation, the precautionary saving demand lowers the
risk-free rate but not stock return and generates\ a substantial liquidity
premium. This model also replicates many other salient features of the
data, including the first two moments of the risk-free rate, excess stock
volatility, stock return predictability, and the unstable relation between
stock volatility and the dividend yield.
Initial Public Offerings in Hot and Cold Markets
Jean Helwege and Nellie Liang
The literature offers many explanations for why the IPO market cycles from
hot to cold. These include theories in which hot markets represent clusters
of IPOs in a new industry, and signaling models that predict that hot
markets draw in better quality firms. Others suggest hot market IPOs' stock
returns reflect their poor quality. We compare IPOs over cycles during
1975--2000 and find that hot and cold IPO markets do not differ so much in
the characteristics of the firms that go public as in the quantity of firms
that go public. Both hot and cold IPOs are largely concentrated in the same
narrow set of industries and they have few distinctions in profits, age, or
growth potential. Our results suggest that hot markets are not driven
primarily by changes in adverse selection costs, managerial opportunism, or
technological innovations, but more likely reflect greater investor
optimism.
Limited Partnerships and Reputation Formation
Jarl G. Kallberg, Crocker H. Liu, and Anand Srinivasan
This paper analyzes the optimal quality decision of a producer in a
multi-period setting with reputation effects. Using a unique database of
returns on real estate limited partnerships (RELPs), we empirically examine
alternative theoretical predictions of optimal producer strategy. In
particular, we test whether the producers in our market invest in reputation
building by initially selling high quality goods and then lowering quality.
Using a variety of statistical tests, we find evidence consistent with
reputation building, both in the aggregate and for individual developers.
Do Indirect Investment Barriers Contribute to Capital Market
Segmentation?
George P. Nishiotis
Using a sample of emerging market closed-end funds, I find evidence that
indirect investment barriers exert powerful effects on asset pricing
differences across countries. I show that not only do indirect investment
barriers contribute to international capital market segmentation, but also
they can lead to segmentation even in the absence of strong capital inflow
restrictions. This result is consistent with Bekaert and Harvey's (1995)
conclusion that “other markets appear segmented even though
foreigners have relatively free access to their capital markets” (p.
403). The empirical results of this paper provide a rational market
segmentation explanation of both premiums and discounts in emerging market
closed-end funds, and they are consistent with the deterrent effect of
indirect barriers on equity flows to emerging markets found in the capital
flow literature.
Why Do IPO Underwriters Allocate Extra Shares when They Expect to Buy Them Back?
Donghang Zhang
I argue that overallocation is used as a marketing strategy to increase
the offer price and aftermarket price of an initial public offering
(IPO). I show that, when there is weak demand, it can be optimal for the
underwriter to oversell an issue and take a naked short position. The
issuing firm benefits from a higher expected offer price. This is in spite
of the fact that, in equilibrium, allocating more shares when there is
weak demand requires greater underpricing when there is strong demand.
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