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.

Rewriting History

Published: 07/16/2009   |   DOI: 10.1111/j.1540-6261.2009.01484.x

ALEXANDER LJUNGQVIST, CHRISTOPHER MALLOY, FELICIA MARSTON

We document widespread changes to the historical I/B/E/S analyst stock recommendations database. Across seven I/B/E/S downloads, obtained between 2000 and 2007, we find that between 6,580 (1.6%) and 97,582 (21.7%) of matched observations are different from one download to the next. The changes include alterations of recommendations, additions and deletions of records, and removal of analyst names. These changes are nonrandom, clustering by analyst reputation, broker size and status, and recommendation boldness, and affect trading signal classifications and back‐tests of three stylized facts: profitability of trading signals, profitability of consensus recommendation changes, and persistence in individual analyst stock‐picking ability.

Monitoring Managers: Does It Matter?

Published: 11/26/2012   |   DOI: 10.1111/jofi.12004

FRANCESCA CORNELLI, ZBIGNIEW KOMINEK, ALEXANDER LJUNGQVIST

We study how well‐incentivized boards monitor CEOs and whether monitoring improves performance. Using unique, detailed data on boards' information sets and decisions for a large sample of private equity–backed firms, we find that gathering information helps boards learn about CEO ability. “Soft” information plays a much larger role than hard data, such as the performance metrics that prior literature focuses on, and helps avoid firing a CEO for bad luck or in response to adverse external shocks. We show that governance reforms increase the effectiveness of board monitoring and establish a causal link between forced CEO turnover and performance improvements.

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.

Investor Sentiment and Pre‐IPO Markets

Published: 05/16/2006   |   DOI: 10.1111/j.1540-6261.2006.00870.x

FRANCESCA CORNELLI, DAVID GOLDREICH, ALEXANDER LJUNGQVIST

We examine whether irrational behavior among small (retail) investors drives post‐IPO prices. We use prices from the grey market (the when‐issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating overoptimism) are a very good predictor of first‐day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long‐run price reversal only following high grey market prices. This asymmetry occurs because larger (institutional) investors can choose between keeping the shares they are allocated in the IPO, and reselling them when small investors are overoptimistic.

What Is a Patent Worth? Evidence from the U.S. Patent “Lottery”

Published: 11/27/2019   |   DOI: 10.1111/jofi.12867

JOAN FARRE‐MENSA, DEEPAK HEGDE, ALEXANDER LJUNGQVIST

We provide evidence on the value of patents to startups by leveraging the quasi‐random assignment of applications to examiners with different propensities to grant patents. Using unique data on all first‐time applications filed at the U.S. Patent Office since 2001, we find that startups that win the patent “lottery” by drawing lenient examiners have, on average, 55% higher employment growth and 80% higher sales growth five years later. Patent winners also pursue more, and higher quality, follow‐on innovation. Winning a first patent boosts a startup’s subsequent growth and innovation by facilitating access to funding from venture capitalists, banks, and public investors.

Networking as a Barrier to Entry and the Competitive Supply of Venture Capital

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01554.x

YAEL V. HOCHBERG, ALEXANDER LJUNGQVIST, YANG LU

We examine whether strong networks among incumbent venture capitalists (VCs) in local markets help restrict entry by outside VCs, thus improving incumbents' bargaining power over entrepreneurs. More densely networked markets experience less entry, with a one‐standard deviation increase in network ties among incumbents reducing entry by approximately one‐third. Entrants with established ties to target‐market incumbents appear able to overcome this barrier to entry; in turn, incumbents react strategically to an increased threat of entry by freezing out any incumbents who facilitate entry into their market. Incumbents appear to benefit from reduced entry by paying lower prices for their deals.

Whom You Know Matters: Venture Capital Networks and Investment Performance

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2007.01207.x

YAEL V. HOCHBERG, ALEXANDER LJUNGQVIST, YANG LU

Many financial markets are characterized by strong relationships and networks, rather than arm's‐length, spot market transactions. We examine the performance consequences of this organizational structure in the context of relationships established when VCs syndicate portfolio company investments. We find that better‐networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company. Similarly, the portfolio companies of better‐networked VCs are significantly more likely to survive to subsequent financing and eventual exit. We also provide initial evidence on the evolution of VC networks.

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.

Testing Disagreement Models

Published: 05/11/2022   |   DOI: 10.1111/jofi.13137

YEN‐CHENG CHANG, PEI‐JIE HSIAO, ALEXANDER LJUNGQVIST, KEVIN TSENG

We provide plausibly identified evidence for the role of investor disagreement in asset pricing. Our natural experiment exploits the staggered implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, which induces a reduction in investor disagreement. Consistent with models of investor disagreement, EDGAR inclusion helps resolve disagreement around information events, leading to stock price corrections. The reduction in disagreement following EDGAR inclusion also reduces stock price crash risk, especially among stocks with binding short‐sale constraints and high investor optimism.

Shaping Liquidity: On the Causal Effects of Voluntary Disclosure

Published: 05/28/2014   |   DOI: 10.1111/jofi.12180

KARTHIK BALAKRISHNAN, MARY BROOKE BILLINGS, BRYAN KELLY, ALEXANDER LJUNGQVIST

Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms actively shape their information environments by voluntarily disclosing more information than regulations mandate and that such efforts improve liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear motivated by a desire to reduce information asymmetries between retail and institutional investors. Liquidity improves as a result and in turn increases firm value. This suggests that managers can causally influence their cost of capital via voluntary disclosure.

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.