The Journal of Finance

Does Prospect Theory Explain IPO Market Behavior?

Published: 08/12/2005   |   DOI: 10.1111/j.1540-6261.2005.00779.x

ALEXANDER LJUNGQVIST, WILLIAM J. WILHELM

We derive a behavioral measure of the IPO decision‐maker's satisfaction with the underwriter's performance based on Loughran and Ritter (2002) and assess its ability to explain the decision‐maker's choice among underwriters in subsequent securities offerings. Controlling for other known factors, IPO firms are less likely to switch underwriters when our behavioral measure indicates they were satisfied with the IPO underwriter's performance. Underwriters also extract higher fees for subsequent transactions involving satisfied decision‐makers. Although our tests suggest that the behavioral model has explanatory power, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.

IPO Pricing in the Dot‐com Bubble

Published: 03/21/2003   |   DOI: 10.1111/1540-6261.00543

Alexander Ljungqvist, William J. Wilhelm

IPO underpricing reached astronomical levels during 1999 and 2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by marked changes in pre‐IPO ownership structure and insider selling behavior over the period, which reduced key decision makers' incentives to control underpricing. After controlling for these changes, the difference in underpricing between 1999 and 2000 and the preceding three years is much reduced. Our results suggest that it was firm characteristics that were unique during the “dot‐com bubble” and that pricing behavior followed from incentives created by these characteristics.

An Empirical Investigation of Short‐Selling Activity Prior to Seasoned Equity Offerings

Published: 06/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02701.x

ASSEM SAFIEDDINE, WILLIAM J. WILHELM

We investigate the nature and magnitude of short‐selling activity around seasoned equity offerings, the relation between short‐selling activity and issue discounts, and the consequences of the Securities and Exchange Commission (SEC's) adoption of Rule 10b‐21 in response to concerns about manipulative short‐selling practices. Seasoned offerings are characterized by abnormally high levels of short selling and option open interest. Higher levels of such activity are related to lower expected proceeds from the issuance of new shares. Where it could not be circumvented, Rule 10b‐21 appears to have curbed short‐selling activity and reduced issue discounts.

The Demise of Investment Banking Partnerships: Theory and Evidence

Published: 01/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01317.x

ALAN D. MORRISON, WILLIAM J. WILHELM

In 1970 the New York Stock Exchange relaxed rules that prohibited the public incorporation of member firms. Investment banking concerns went public in waves, with Goldman Sachs the last of the bulge bracket banks to float. We explain the pattern of investment bank flotations. We argue that partnerships foster the formation of human capital and we use technological advances that undermine the role of human capital to explain the partnership's going‐public decision. We support our theory using a new data set of investment bank partnership statistics.

Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations

Published: 01/20/2006   |   DOI: 10.1111/j.1540-6261.2006.00837.x

ALEXANDER LJUNGQVIST, FELICIA MARSTON, WILLIAM J. WILHELM

We investigate whether analyst behavior influenced banks' likelihood of winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings in 1993–2002. We control for the strength of the issuer's investment banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank's decision to provide analyst coverage. Although analyst behavior was influenced by economic incentives, we find no evidence that aggressive analyst behavior increased their bank's probability of winning an underwriting mandate. The main determinant of the lead‐bank choice is the strength of prior underwriting and lending relationships.

Evidence of Information Spillovers in the Production of Investment Banking Services

Published: 03/21/2003   |   DOI: 10.1111/1540-6261.00538

Lawrence M. Benveniste, Alexander Ljungqvist, William J. Wilhelm, Xiaoyun Yu

We provide evidence that firms attempting IPOs condition offer terms and the decision whether to carry through with an offering on the experience of their primary market contemporaries. Moreover, while initial returns and IPO volume are positively correlated in the aggregate, the correlation is negative among contemporaneous offerings subject to a common valuation factor. Our findings are consistent with investment banks implicitly bundling offerings subject to a common valuation factor to achieve more equitable internalization of information production costs and thereby preventing coordination failures in primary equity markets.