We develop a theoretical analysis of the choice of firms between fixed-price offerings and uniform-price auctions for selling shares in IPOs and privatizations. We consider a setting in which a firm goes public by selling a fraction of its equity in an IPO market where insiders have private information about intrinsic firm value. Outsiders can, however, produce information at a cost about the firm before bidding for shares. Firm insiders care about the extent of information production by outsiders, since this information will be reflected in the secondary market price, giving a higher secondary market price for higher intrinsic-value firms. We show that auctions and fixed-price offerings have different properties in terms of inducing information production. Thus, in many situations, firms prefer to go public using fixed-price offerings rather than IPO auctions in equilibrium. We relate the equilibrium choice between fixed-price offerings and IPO auctions to various characteristics of the firm going public. Unlike the existing literature, our model is able to explain not only the widely-documented empirical finding that underpricing is lower in IPO auctions than in fixed-price offerings (e.g., Derrien and Womack (2000)), but also the fact that, despite this, auctions are losing market share around the world. Our model thus suggests a resolution to the above "IPO auction puzzle," and indicates how current IPO auction mechanisms can be reformed to become more competitive with fixed-price offerings. Our results also provide various other hypotheses for further empirical research.
{"title":"How Should a Firm Go Public? A Dynamic Model of the Choice between Fixed-Price Offerings and Auctions in Ipos and Privatizations","authors":"Thomas J. Chemmanur, Mark H. Liu","doi":"10.2139/ssrn.423860","DOIUrl":"https://doi.org/10.2139/ssrn.423860","url":null,"abstract":"We develop a theoretical analysis of the choice of firms between fixed-price offerings and uniform-price auctions for selling shares in IPOs and privatizations. We consider a setting in which a firm goes public by selling a fraction of its equity in an IPO market where insiders have private information about intrinsic firm value. Outsiders can, however, produce information at a cost about the firm before bidding for shares. Firm insiders care about the extent of information production by outsiders, since this information will be reflected in the secondary market price, giving a higher secondary market price for higher intrinsic-value firms. We show that auctions and fixed-price offerings have different properties in terms of inducing information production. Thus, in many situations, firms prefer to go public using fixed-price offerings rather than IPO auctions in equilibrium. We relate the equilibrium choice between fixed-price offerings and IPO auctions to various characteristics of the firm going public. Unlike the existing literature, our model is able to explain not only the widely-documented empirical finding that underpricing is lower in IPO auctions than in fixed-price offerings (e.g., Derrien and Womack (2000)), but also the fact that, despite this, auctions are losing market share around the world. Our model thus suggests a resolution to the above \"IPO auction puzzle,\" and indicates how current IPO auction mechanisms can be reformed to become more competitive with fixed-price offerings. Our results also provide various other hypotheses for further empirical research.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"95 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122981545","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The introduction of the European Markets in Financial Instruments Directive (MiFID) ended the quasi-monopoly of national exchanges in equity trading across Europe and many new trading platforms emerged. European trading venues are neither formally linked by technology nor does regulation enforce price-priority across platforms. This raises the question of market integration of fragmented markets. We find that quotes for UK blue chips are closely linked across trading venues and that a high fraction of trades is executed at best available prices. Our results suggest that competition forces competing but disconnected platforms to quote prices as if they were formally linked.
{"title":"Do we need a European 'National Market System'? Competition, Arbitrage, and Suboptimal Executions","authors":"Andreas Storkenmaier, M. Wagener","doi":"10.2139/ssrn.1760778","DOIUrl":"https://doi.org/10.2139/ssrn.1760778","url":null,"abstract":"The introduction of the European Markets in Financial Instruments Directive (MiFID) ended the quasi-monopoly of national exchanges in equity trading across Europe and many new trading platforms emerged. European trading venues are neither formally linked by technology nor does regulation enforce price-priority across platforms. This raises the question of market integration of fragmented markets. We find that quotes for UK blue chips are closely linked across trading venues and that a high fraction of trades is executed at best available prices. Our results suggest that competition forces competing but disconnected platforms to quote prices as if they were formally linked.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128807651","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper summarizes the short selling restrictions adopted - mainly on an emergency basis - in the time period of July 2008 up to mid-June 2010 in 56 countries around the world. It is a supplement to a recent article of the authors (Gruenewald et al., 2010) and gives a detailed overview of the regulators’ short-term measures ranging from complete short selling bans to extra disclosure obligations for short sellers. The overview includes the measures’ time frame, type and exceptions as well as information on the targeted firms. Although not all countries have implemented short selling restrictions, their impact is massive: Approximately 80% of the December 2008 stock market capitalizations of the countries in our sample were directly or indirectly affected by some emergency short selling restriction.
{"title":"Emergency Short Selling Restrictions in the Course of the Financial Crisis","authors":"Seraina N. Grunewald, A. Wagner, R. Weber","doi":"10.2139/SSRN.1441236","DOIUrl":"https://doi.org/10.2139/SSRN.1441236","url":null,"abstract":"This paper summarizes the short selling restrictions adopted - mainly on an emergency basis - in the time period of July 2008 up to mid-June 2010 in 56 countries around the world. It is a supplement to a recent article of the authors (Gruenewald et al., 2010) and gives a detailed overview of the regulators’ short-term measures ranging from complete short selling bans to extra disclosure obligations for short sellers. The overview includes the measures’ time frame, type and exceptions as well as information on the targeted firms. Although not all countries have implemented short selling restrictions, their impact is massive: Approximately 80% of the December 2008 stock market capitalizations of the countries in our sample were directly or indirectly affected by some emergency short selling restriction.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-06-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126173595","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Both Europe and the United States are rethinking their approach to aggregate litigation. In the United States, class actions have long been organized around an entrepreneurial model that uses economic incentives to align the interest of the class attorney with those of the class. But increasingly, potential class members are preferring exit to voice, suggesting that the advantages of the U.S. model may have been overstated. In contrast, Europe has long resisted the U.S.’s entrepreneurial model, and the contemporary debate in Europe centers on whether certain elements of the U.S. model - namely, opt-out class actions, contingent fees, and the “American rule” on fee shifting - must be adopted in order to assure access to justice. Because legal transplants rarely take, this Essay offers an alternative “non-entrepreneurial model” for aggregate litigation that is consistent with European traditions. Relying less on economic incentives, it seeks to design a representative plaintiff for the class action who would function as a true “gatekeeper,” pledging its reputational capital to assure class members of its loyal performance. Effectively, this model marries aspects of U.S. “public interest” litigation with existing European class action practice. Examining the differences between U.S. and European practice, this Essay argues none of these differences are dispositively prohibitive and that functional substitutes, including an opt-in class action and third party funding, could be engineered so as to yield roughly comparable results. Although the two systems might perform similarly in terms of compensation, the ultimate question, it argues, is the degree to which a jurisdiction wishes to authorize and arm a private attorney general to pursue deterrence for profit.
{"title":"Litigation Governance: Taking Accountability Seriously","authors":"J. Coffee","doi":"10.2139/SSRN.1503513","DOIUrl":"https://doi.org/10.2139/SSRN.1503513","url":null,"abstract":"Both Europe and the United States are rethinking their approach to aggregate litigation. In the United States, class actions have long been organized around an entrepreneurial model that uses economic incentives to align the interest of the class attorney with those of the class. But increasingly, potential class members are preferring exit to voice, suggesting that the advantages of the U.S. model may have been overstated. In contrast, Europe has long resisted the U.S.’s entrepreneurial model, and the contemporary debate in Europe centers on whether certain elements of the U.S. model - namely, opt-out class actions, contingent fees, and the “American rule” on fee shifting - must be adopted in order to assure access to justice. Because legal transplants rarely take, this Essay offers an alternative “non-entrepreneurial model” for aggregate litigation that is consistent with European traditions. Relying less on economic incentives, it seeks to design a representative plaintiff for the class action who would function as a true “gatekeeper,” pledging its reputational capital to assure class members of its loyal performance. Effectively, this model marries aspects of U.S. “public interest” litigation with existing European class action practice. Examining the differences between U.S. and European practice, this Essay argues none of these differences are dispositively prohibitive and that functional substitutes, including an opt-in class action and third party funding, could be engineered so as to yield roughly comparable results. Although the two systems might perform similarly in terms of compensation, the ultimate question, it argues, is the degree to which a jurisdiction wishes to authorize and arm a private attorney general to pursue deterrence for profit.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128659408","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This essay, part of a symposium on narrative in corporate law, considers various portrayals of the complicity of the SEC in the Bernard Madoff scandal - including the Commission's own Inspector General's report issued in September 2009. It considers possible explanations (revolving door problems, incompetence and sloth, etc.) but suggests that the story is deeper and more frustrating, arising out of the relative poverty in which the SEC operates, which in turn leads to habits of thought and action that leave too much unnoticed and undone. The interesting question, then: why the poverty? The essay concludes with a political explanation. While by no means meant to excuse the neglect in the Madoff matters, the essay suggests the possibility of a more sympathetic portrayal of the work-a-day world of securities regulation.
{"title":"The SEC and the Madoff Scandal: Three Narratives in Search of a Story","authors":"Donald C. Langevoort","doi":"10.2139/SSRN.1475433","DOIUrl":"https://doi.org/10.2139/SSRN.1475433","url":null,"abstract":"This essay, part of a symposium on narrative in corporate law, considers various portrayals of the complicity of the SEC in the Bernard Madoff scandal - including the Commission's own Inspector General's report issued in September 2009. It considers possible explanations (revolving door problems, incompetence and sloth, etc.) but suggests that the story is deeper and more frustrating, arising out of the relative poverty in which the SEC operates, which in turn leads to habits of thought and action that leave too much unnoticed and undone. The interesting question, then: why the poverty? The essay concludes with a political explanation. While by no means meant to excuse the neglect in the Madoff matters, the essay suggests the possibility of a more sympathetic portrayal of the work-a-day world of securities regulation.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-09-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130533053","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The federal regulation of financial markets was one of the success stories of the New Deal. It was also the realm of New Deal statebuilding most dominated by lawyers who had either worked in large corporate law firms or had all the credentials to do so but were excluded on grounds of ethnicity, gender or race. Government lawyers looked to the law factories of Wall Street for inspiration as they built bureaucratic autonomy at the Securities and Exchange Commission and gave private practitioners their own stake in securities regulation. The SEC lawyers also learned to address the partisan needs of their allies in Congress, who were as hostile to Eastern capital as they were solicitous of investors, while maintaining the independence that made their agency useful to politicians in the first place. Their experiences are instructive for the architects of financial regulation today.
{"title":"Lawyers, Bureaucratic Autonomy, and Securities Regulation During the New Deal","authors":"Daniel R. Ernst","doi":"10.2139/SSRN.1470934","DOIUrl":"https://doi.org/10.2139/SSRN.1470934","url":null,"abstract":"The federal regulation of financial markets was one of the success stories of the New Deal. It was also the realm of New Deal statebuilding most dominated by lawyers who had either worked in large corporate law firms or had all the credentials to do so but were excluded on grounds of ethnicity, gender or race. Government lawyers looked to the law factories of Wall Street for inspiration as they built bureaucratic autonomy at the Securities and Exchange Commission and gave private practitioners their own stake in securities regulation. The SEC lawyers also learned to address the partisan needs of their allies in Congress, who were as hostile to Eastern capital as they were solicitous of investors, while maintaining the independence that made their agency useful to politicians in the first place. Their experiences are instructive for the architects of financial regulation today.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"3 4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-09-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131709815","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Evidence is accumulating that in making investment decisions, many investors do not employ a 'rational expectations' approach in which they anticipate others’ future behavior by analyzing their incentives and constraints. Rather, many investors rely on trust. Indeed, trust may be essential to a well-developed securities market. A growing empirical literature investigates why and when people trust, and this literature offers several useful lessons. In particular, most people seem surprisingly willing to trust other people, and even institutions like 'the market,' in novel situations. Trust behavior, however, is subject to history effects. When trust is not met by trustworthiness but instead is abused, trust tends to disappear. These lessons carry significant implications for our understanding of modern securities markets.
{"title":"Trust Behavior: The Essential Foundation of Securities Markets","authors":"Lynn A. Stout","doi":"10.2139/ssrn.1442023","DOIUrl":"https://doi.org/10.2139/ssrn.1442023","url":null,"abstract":"Evidence is accumulating that in making investment decisions, many investors do not employ a 'rational expectations' approach in which they anticipate others’ future behavior by analyzing their incentives and constraints. Rather, many investors rely on trust. Indeed, trust may be essential to a well-developed securities market. A growing empirical literature investigates why and when people trust, and this literature offers several useful lessons. In particular, most people seem surprisingly willing to trust other people, and even institutions like 'the market,' in novel situations. Trust behavior, however, is subject to history effects. When trust is not met by trustworthiness but instead is abused, trust tends to disappear. These lessons carry significant implications for our understanding of modern securities markets.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"78 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134376622","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
To avoid the cumulative application of takeover regulation of more jurisdictions, it is common practice to exclude from the offer shareholders resident in countries adopting extraterritorial conflict rules. Among such countries, the most significant case is that of US securities regulation: according to US case-law, in order to avoid the application of US takeover regulation and anti-fraud provisions, bidders should completely exclude any publicity of the offer in the US or to US resident and consider acceptances from US residents as void. However, such restrictions could be at odds with the principle of equal treatments of target’s shareholders, provided for by the EU Takeover Directive. In the paper I argue that only restrictions to dissemination could be reconciled with the equality principle. On the contrary, restrictions to acceptance represent a clear violation of such principle, which can be admitted only if the cumulative application of US law would make the offer unfeasible.
{"title":"Exclusion of US-Holders in Cross-Border Takeover Bids and the Principle of Equality in Tender Offers","authors":"F. Mucciarelli","doi":"10.2139/ssrn.1399496","DOIUrl":"https://doi.org/10.2139/ssrn.1399496","url":null,"abstract":"To avoid the cumulative application of takeover regulation of more jurisdictions, it is common practice to exclude from the offer shareholders resident in countries adopting extraterritorial conflict rules. Among such countries, the most significant case is that of US securities regulation: according to US case-law, in order to avoid the application of US takeover regulation and anti-fraud provisions, bidders should completely exclude any publicity of the offer in the US or to US resident and consider acceptances from US residents as void. However, such restrictions could be at odds with the principle of equal treatments of target’s shareholders, provided for by the EU Takeover Directive. In the paper I argue that only restrictions to dissemination could be reconciled with the equality principle. On the contrary, restrictions to acceptance represent a clear violation of such principle, which can be admitted only if the cumulative application of US law would make the offer unfeasible.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"80 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-05-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116177655","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-04-29DOI: 10.1111/j.1475-679X.2009.00329.x
O. Hart
Many of the papers in this special issue are concerned with regulation and some with Sarbanes-Oxley (SOX). In this commentary I will begin by summarizing the arguments for regulation that have been made in the literature.1 I will then consider whether these arguments apply to SOX. I will suggest that, rather than being based on sound principles, regulation often seems to be a consequence of the public’s need for action in response to a crisis, and that this was the case with SOX .I will argue that the recent financial meltdown provides another example of the same phenomenon.
{"title":"Regulation and Sarbanes-Oxley","authors":"O. Hart","doi":"10.1111/j.1475-679X.2009.00329.x","DOIUrl":"https://doi.org/10.1111/j.1475-679X.2009.00329.x","url":null,"abstract":"Many of the papers in this special issue are concerned with regulation and some with Sarbanes-Oxley (SOX). In this commentary I will begin by summarizing the arguments for regulation that have been made in the literature.1 I will then consider whether these arguments apply to SOX. I will suggest that, rather than being based on sound principles, regulation often seems to be a consequence of the public’s need for action in response to a crisis, and that this was the case with SOX .I will argue that the recent financial meltdown provides another example of the same phenomenon.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"107 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-04-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133283614","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the relative strength of two imperfect accounting rules: historical cost and mark to market. The manifest inaccuracy of historical cost is well known, and, paradoxically one source of its hidden strength. Because private parties know of its evident weaknesses they look elsewhere for information. In contrast, mark to market for hard-to-value assets has many hidden weaknesses. In this paper we show how it creates asset bubbles and exacerbate their negative collateral consequences once they burst. It does the former by allowing banks to adopt generous valuations in up-markets that increase their lending capacity. It does the latter by forcing the hand of counterparties to demand collateral even when watchful waiting and inaction is the more efficient course of action when the downward cascades generated by mark-to-market accounting may trigger massive sell-offs at prices below true asset value. The fears of private suits and regulatory sanctions on counterparties can compound the problem. Mark to market generates the functional equivalent of bank runs for which the functional equivalent of the automatic-stay rule in bankruptcy is the appropriate response.
{"title":"Do Accounting Rules Matter? The Dangerous Allure of Mark to Market","authors":"R. Epstein, M. Henderson","doi":"10.2139/SSRN.1385382","DOIUrl":"https://doi.org/10.2139/SSRN.1385382","url":null,"abstract":"This paper examines the relative strength of two imperfect accounting rules: historical cost and mark to market. The manifest inaccuracy of historical cost is well known, and, paradoxically one source of its hidden strength. Because private parties know of its evident weaknesses they look elsewhere for information. In contrast, mark to market for hard-to-value assets has many hidden weaknesses. In this paper we show how it creates asset bubbles and exacerbate their negative collateral consequences once they burst. It does the former by allowing banks to adopt generous valuations in up-markets that increase their lending capacity. It does the latter by forcing the hand of counterparties to demand collateral even when watchful waiting and inaction is the more efficient course of action when the downward cascades generated by mark-to-market accounting may trigger massive sell-offs at prices below true asset value. The fears of private suits and regulatory sanctions on counterparties can compound the problem. Mark to market generates the functional equivalent of bank runs for which the functional equivalent of the automatic-stay rule in bankruptcy is the appropriate response.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"104 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-04-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121249297","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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