lec15_with_answers_up_to_where_we_got

lec15_with_answers_up_to_where_we_got - Econ 138 Financial...

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Econ 138 Financial and Behavioral Economics Lecture 15: Asymmetric Information: IPOs Ulrike Malmendier UC Berkeley Th, March 13, 2008
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PS 3 due in class, Th, 3/20.
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1 Corporate Financing and Asymmetric Informa- tion 3. Application: Market Timing of Equity Issues Empirical phenomenon of Market Timing : Firms to to issue shares when stock prices are high and repurchase when prices are low. Rational, asymmetric information model: Time of high equity issuances (= high investment-project fi nancing in our baseline model) are times of good investment opportunities τ . The fi nancing constraint [( μp + (1 μ ) q ) + τ ] R I is more likely to hold for high τ .
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Caveats: a number of empirical facts speak against the purely rational model and for a more behavioral model (in which managers exploit ‘in- vestor sentiment’ about their stock, i.e., issue shares when their stock is overvalued and repurchase shares when their stock is undervlaued.) Stock price decline conditional on issuance. (Interpretation: reveals overvaluation). Analyses of earnings forecasts and realizations around equity issues suggest that fi rms tend to issue equity at times when investors are rather too enthusiastic about earnings prospects.
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4. Application: IPO Underpricing 4.1 IPOs - Basics and Stylized Facts Initial Public O ff ering = Process by which a fi rm sells equity to the public for the fi rst time. Role of underwriter in o ff ering Set o ff ering price Market (road shows, collect orders) Allocation Price stabilization Types of underwriters Lead or book manager (controls the o ff ering; conducts a due diligence of company = investigates prospects & fi nancial statements & manage- ment team & strategy; assembles team with PR fi rm, law fi rm [prepare fi lings], auditor [books conform to accounting standards]).
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Co-managers (engaged by book manager to support process above) Syndicate members (participate in distributing IPO / share risk; group of underwriters) Most are underwritten by an investment bank.
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