The Journal of Finance

The Wisdom of the Robinhood Crowd

Published: 03/28/2022   |   DOI: 10.1111/jofi.13128

IVO WELCH

Robinhood investors increased their holdings in the March 2020 COVID bear market, indicating an absence of collective panic and margin calls. This steadfastness was rewarded in the subsequent bull market. Despite unusual interest in some “experience” stocks (e.g., cannabis stocks), they tilted primarily toward stocks with high past share volume and dollar‐trading volume (themselves mostly big stocks). From mid‐2018 to mid‐2020, an aggregated crowd consensus portfolio (a proxy for the household‐equal‐weighted portfolio) had both good timing and good alpha.

Sequential Sales, Learning, and Cascades

Published: 06/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04406.x

IVO WELCH

When IPO shares are sold sequentially, later potential investors can learn from the purchasing decisions of earlier investors. This can lead rapidly to “cascades” in which subsequent investors optimally ignore their private information and imitate earlier investors. Although rationing in this situation gives rise to a winner's curse, it is irrelevant. The model predicts that: (1) Offerings succeed or fail rapidly. (2) Demand can be so elastic that even risk‐neutral issuers underprice to completely avoid failure. (3) Issuers with good inside information can price their shares so high that they sometimes fail. (4) An underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market.

Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings

Published: 06/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb05064.x

IVO WELCH

This paper presents a signalling model in which high‐quality firms underprice at the initial public offering (IPO) in order to obtain a higher price at a seasoned offering. The main assumptions are that low‐quality firms must invest in imitation expenses to appear to be high‐quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high‐quality firms at the IPO can then add sufficient signalling costs to these imitation expenses to induce low‐quality firms to reveal their quality voluntarily. The model is consistent with several documented empirical regularities and offers new testable implications. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital in the years after their IPO.

The Optimal Concentration of Creditors

Published: 09/16/2005   |   DOI: 10.1111/j.1540-6261.2005.00796.x

ARTURO BRIS, IVO WELCH

Our model assumes that creditors need to expend resources to collect on claims. Consequently, because diffuse creditors suffer from mutual free‐riding (Holmstrom (1982)), they fare worse than concentrated creditors (e.g., a house bank). The model predicts that measures of debt concentration relate positively to creditors' (aggregate) debt collection expenditures and positively to management's chosen expenditures to resist paying. However, collection activity is purely redistributive, so social waste is larger when creditors are concentrated. If borrower quality is not known, the best firms choose the most concentrated creditors and pay higher expected yields.

A Review of IPO Activity, Pricing, and Allocations

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00478

Jay R. Ritter, Ivo Welch

We review the theory and evidence on IPO activity: why firms go public, why they reward first‐day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from nonrational and agency conflict explanations. We describe some promising such alternatives.

The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization

Published: 05/16/2006   |   DOI: 10.1111/j.1540-6261.2006.00872.x

ARTURO BRIS, IVO WELCH, NING ZHU

Our paper explores a comprehensive sample of small and large corporate bankruptcies in Arizona and New York from 1995 to 2001. Bankruptcy costs are very heterogeneous and sensitive to the measurement method used. We find that Chapter 7 liquidations appear to be no faster or cheaper (in terms of direct expense) than Chapter 11 reorganizations. However, Chapter 11 seems to preserve assets better, thereby allowing creditors to recover relatively more. Our paper also provides a large number of further empirical regularities.

A Theory of Dividends Based on Tax Clienteles

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00298

Franklin Allen, Antonio E. Bernardo, Ivo Welch

This paper explains why some firms prefer to pay dividends rather than repurchase shares. When institutional investors are relatively less taxed than individual investors, dividends induce “ownership clientele” effects. Firms paying dividends attract relatively more institutions, which have a relative advantage in detecting high firm quality and in ensuring firms are well managed. The theory is consistent with some documented regularities, specifically both the presence and stickiness of dividends, and offers novel empirical implications, e.g., a prediction that it is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.

Earnings Management and the Long‐Run Market Performance of Initial Public Offerings

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00079

Siew Hong Teoh, Ivo Welch, T.J. Wong

Issuers of initial public offerings (IPOs) can report earnings in excess of cash flows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most “aggressive” quartile of earnings managers have a three‐year aftermarket stock return of approximately 20 percent less than IPO issuers in the most “conservative” quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications.