Craig G. Dunbar

Factors affecting investment bank initial public offering market share

This paper examines the effect of several factors on the market share of investment banks that act as book managers in initial public offerings (IPOs) between 1984 and 1995. For established banks, IPO firstday returns, one-year abnormal performance, abnormal compensation, industry specialization, analyst reputation, and association with withdrawn offers have a significant impact on changes in market share. These factors have a more significant effect on market share changes in low-volume IPO markets. These factors have a less significant effect on market share, statistically and economically, for less established banks, consistent with the notion that less reputation is placed at risk.

The use of warrants as underwriter compensation in initial public offerings

Abstract Previous research suggests that offering costs are higher when warrants are used to compensate underwriters. This finding potentially arises from a failure to account for self-selection in estimating offering cost relations. Using methods that account for self-selection, I find that underpricing and total offering costs are reduced for firms using warrants as underwriter compensation, consistent with the hypothesis that issuers choose compensation contracts which minimize costs.

Long-Run Performance and Insider Trading in Completed and Canceled Seasoned Equity Offerings

This paper provides evidence on managerial motives for raising equity by examining long-run performance and insider trading around canceled and completed seasoned equity offerings (SEOs). Insider selling increases prior to competed and canceled SEOs, but declines afferward only for canceled offerings. For completed SEOs, pre-filing insider trading is related to long-run performance after completion. For Canceled sEOs, pre-filing insider trading is related to stock performance between filing and cancellation. Finally, changes in dence is consistent with insiders exploiting windows of opportunity by attempting to issue overvalued equity and by canceling the issue when the market reaction to the announcement eliminates the overvaluation.

Overallotment option restrictions and contract choice in initial public offerings

Abstract Relaxation of the national association of securities dealers (NASD) limit on overallotment option use in 1983 provides a natural experiment to test the substitutability or complementarity of underwriting contract terms in initial public offerings. For firms that would find the initial limit constraining, use of terms that are substitutes (complements) should decrease (increase) after the limit is raised. The evidence indicates that warrant compensation and overallotment options are substitutes. Underwriter reputation and overallotment options are substitutes if warrants are used as compensation and complements otherwise. The significant change in contract terms after 1983 suggests the initial NASD policy was costly.

Post IPO Withdrawal Outcomes

While existing research shows that a large number of IPOs are withdrawn from registration, little is known regarding the fates of those firms. This study documents capital market activities and corporate outcomes for 588 withdrawn IPOs between 1999 and 2004. We find that 13% of withdrawing issuers return for a successful IPO, 36% are able to raise capital privately and 42% either merge or are acquired with 11% filing for bankruptcy. While the implied valuation from post-withdrawal mergers/acquisitions and returning IPOs are similar to valuations implied in the initial withdrawn filing, implied valuations from private placements are significantly discounted. The ex-ante probabilities of post withdrawal outcomes and post withdrawal valuations are found to have significant effects on the choice to withdraw an IPO.

Raising Capital after IPO Withdrawal

We document the outcomes of every withdrawn U.S. IPO (994) from 1998 to 2011. While prior literature has studied post-withdrawal IPO re-filings and M&A outcomes, one in three firms subsequently raises private capital. Presuming that capital needs motivate most IPOs, firms in need of cash should dual track a private placement alongside the IPO as an alternative. Firms generating negative cash are more likely to conduct private placements, however, firms raise less capital and do so at inferior valuations. Further, certain regulatory changes focused on easing a private capital raise post withdrawal are shown to have unintended consequences. While prior literature has evidenced this damage by way of negative industry reactions to IPO filings and positive reactions to withdrawals, we find opposite effects during and after the IPO Bubble. We also study market reaction to subsequent private placements and find that reactions across events offset one another. The offsetting reactions offer strong evidence that we are capturing the expected competitive effects of a funded rivals the likelihood of raising capital changes with each event.

Deal Flow and the Pricing of IPOs

This study examines how the decisions that issuers and their investment banks make about IPO pricing are affected by the value of deals in registration, measured at the aggregate, industry and bank level both as of the filing date and the offering date (in order to identify changes in the IPO pipeline over the issuance process). Examining 1684 IPOs from1998-2007 we find evidence that measure of the IPO pipeline significantly affect pricing decisions. The evidence is mostly consistent with agency-based arguments that investment banks with large and growing pipelines of deals partially adjust prices given market information but also leave more money on the table. While harming issuers, this both helps clear their pipeline of deals, and attracts institutional clientele ensuring the banks can sell their backlog of deals.

Corporate Social Responsibility and CEO Risk-Taking Incentives

In this paper, we explore how firms adjust CEO compensation incentives in response to corporate social responsibility (CSR) standing. Specifically, we focus on the effect of CSR standing on CEO’s risk-taking incentives. We hypothesize that because firms possessing better social performance generate insurance-like moral capital that protects managers from market discipline, risk averse managers tend to take less risk than is optimal for shareholders. Firms should respond to this agency problem by offering greater risk-taking incentives to managers. Employing a large sample of the US firms from 1992 to 2010, we find strong empirical evidence to support our hypothesis. Indeed, CSR standing is positively related to CEO pay-risk sensitivity (Vega), and this association is driven by CSR strengths rather than CSR concerns. Further, we provide evidence that firm overall risk and idiosyncratic risk negatively moderate the association between CSR and Vega.