James C. Spindler

IPO Underpricing, Disclosure, and Litigation Risk

I find that U.S. IPO prospectus disclosure exhibits significant correlation with first day underpricing, consistent with theories of underpricing as caused by informational asymmetry. In particular, a 1 standard deviation increase in positive prospectus disclosure is associated with almost a third reduction in first day underpricing. More disclosure also has a significant positive relation to measures of informational completeness. Further, I show that the amount of disclosure may derive from litigation risk. Controlling for measures of litigation risk, more disclosure exhibits a significant and positive relation to IPO litigation, while absent controls the relation is negative – suggesting that the amount of disclosure responds to ex ante perceived risk of litigation.

Integrity and Innovation in the Public Capital Markets: A Survey of the Securities Law Literature

A central goal of any economy is to achieve rapid and sustained growth. This cannot happen without continued innovation. This landmark Handbook brings together many of the world’s legal scholars to examine features of the legal infrastructure that affect both innovation and growth. Individual chapters explore different legal subject areas, in most cases offering recommendations for rule changes that could accelerate growth, primarily in the context of the US economy. The introductory chapter provides a framework for these discussions and explains why it is time for legal scholarship and research to move in that direction.

Misreporting and Compensation Under Incomplete Commitment

This paper explores how imperfect commitment can cause managers to under-report the firms value, creating an important role for short-term compensation. Where contracts are renegotiable and the manager expects to receive incentive pay in the future, managers gain by under-reporting value, which boosts subsequent pay: the apparent value of incentive compensation is diminished, requiring more overall pay to meet the managers outside option. Short-term compensation, however, can lead to over-reporting of value. Optimal outcomes can be obtained through limited contractual commitment, such as term employment, non-competes, or non-vesting pay, in combination with short-term compensation. An extension shows that the under-reporting dynamic persists even when reporting includes managerial quality and the manager may face termination for a low report.

Long-Term Incentives to Underperform in the Short Term

A firms manager may choose to underperform in the short-term in order to boost subsequent pay: the apparent value of subsequent incentive compensation is diminished, requiring more overall pay to meet the managers outside option. A greater weight on short-term compensation can counteract these incentives, provided liquidity constraints do not bind. Shifting to more long-term compensation, such as restricted stock and vesting conditions, generally worsens illiquidity and incentive compatibility problems. An extension considers reporting: managers have an incentive to under-report the firms value, which can be remedied by granting short-term stock-based compensation.

Taking a Dive: Long-Term Incentives to Underperform in the Short Term

This paper shows that, where effort and firm type are unobservable, a firms manager has incentives to mimic poor-type firms in the short-term: the apparent value of subsequent incentive compensation is diminished, requiring more subsequent overall pay to meet the managers outside option. Shareholders can remedy such a dynamic by weighting short-term compensation more heavily, although liquidity constraints can render first-best outcomes infeasible. Forcing shareholders to grant more long-term compensation, as recent reforms do with restriction and vesting conditions, does not improve things: they generally exacerbate illiquidity problems and in some cases can frustrate early-period incentive compatibility altogether. An extension of the model shows the same dynamic applies to reporting: managers have an incentive to under-report the firms value, which can be remedied by granting short-term stock-based compensation.