Jan Jindra

Thawing Frozen Capital Markets and Backdoor Bailouts: Evidence from the Fed's Liquidity Programs

During the subprime crisis, the Federal Reserve introduced several emergency liquidity programs as supplements to the discount window (DW): TAF, PDCF, and TSLF. Using data on loans to large commercial banks and primary dealers, we find that the programs were used by relatively few institutions and thus provided limited relief to banks that relied on short-term debt markets. Although usage increased after Lehmans bankruptcy, most commercial banks avoided the DW and TAF. We also find that the programs were more often used by failed European banks than by healthy US banks, likely because these loans are expensive relative to private market funds. Our results also show that usage of PDCF and TSLF programs, while higher, was more often used by primary dealers in weaker financial position.

Venture Capital Valuation, Partial Adjustment, and Underpricing: Behavioral Bias or Information Production?

Using a sample of venture capital (VC)-backed initial public offerings (IPOs), we analyze the role played by perceived valuation changes on IPO underpricing. We find that perceived valuation change from the last pre-IPO VC round to the IPO affects IPO underpricing in a nonlinear way. Further analysis indicates that information-based theories, not behavioral biases, explain this nonlinearity. We also find that the previously documented partial adjustment effect and its nonlinear impact on IPO underpricing are related to the trajectory of the perceived valuation changes, which stands in stark contrast to prior evidence of the importance of behavioral biases.

Crises, Liquidity Shocks, and Fire Sales at Hedge Funds

We investigate hedge fund stock trading from 1998-2010 to test for fire sales. While funds with high capital outflows sell large amounts of stock during crises, these funds also buy stock, rather than using all the proceeds to fulfill redemptions. Further, funds with large outflows rarely sell the same stocks at the same time. For the relatively few stocks that are sold en masse, there is no evidence of price pressure, largely because hedge funds overwhelmingly choose to sell their most liquid, largest, and best-performing stocks. We provide new and compelling evidence that hedge funds neither engage in nor induce fire sales, since their well-diversified portfolios allow them to cherry-pick the most appropriate stocks to sell during crises.

Private Class Action Litigation Risk of Chinese Firms Listed in the U.S.

Chinese reverse mergers (CRMs) claim to provide easy entry to the U.S. and international markets. Recently, a large number of Chinese firms using reverse merger transactions have been listed on the U.S. stock exchanges. We review the historical use and mechanics of these reverse mergers, and contrast them with initial public offerings (IPOs). We also explore settlements of securities class action lawsuits involving Chinese firms. Our analysis shows that larger, more reputable Chinese firms are significantly less likely to pursue reverse mergers. We also find that CRM firms are more likely to be subject to class action litigation in the U.S and that the settlement amounts are smaller for CRM firms than for Chinese IPO firms. Our analysis further indicates that CRM firms significantly underperform the Chinese IPO firms. Thus, the evidence suggests that CRMs are not substitutes for Chinese IPOs.We analyze the litigation risk of Chinese firms listed in the US. We find that firm-specific characteristics from prior literature studying US firms are not correlated with the litigation risk of US-listed Chinese firms. However, our findings indicate that the method of listing is the only reliable predictor of litigation risk — firms listing via reverse merger are significantly more likely to face lawsuits compared to firms listing via initial public offering (IPO). We find that Chinese reverse merger (CRMs) firms, relative to Chinese IPOs, have lower analyst following, similar post-listing stock performance, higher operating cash flows, smaller size, and lower cash holdings. We conclude that the litigation risk differential is consistent with the bonding hypothesis of [Stulz 1999, Globalization of Equity Markets and the Cost of Capital, Journal of Applied Corporate Finance 12, 8–25], wherein the higher litigation risk of CRMs is a reflection of increased but varying levels of monitoring, starting with the regulatory oversight at the pre-listing stage and a post-listing tradeoff between enforcement and monitoring by shareholders.

Learning About Target Firms and Pricing of Acquisitions

More information about a firm should lead to a more precise valuation. As more publicly available information accumulates after a firm’s initial public offering (IPO), valuations should become both easier to carry out and more precise. We examine how this declining valuation uncertainty affects the pricing in acquisitions with targets that are acquired within ten years of their IPOs. These effects of evolving firm characteristics on acquisition pricing are poorly understood, have received limited attention in the literature, and yet, they offer new, and substantively different, explanations for results that are well-established in the literature, such as the target listing effect. In our sample, we first establish that individual firms’ valuation uncertainty declines over time after their IPOs. We then show that acquirer announcement returns decrease and takeover premiums increase with the length of time since the targets’ IPOs. When target valuation uncertainty is high, learning about a target should be more costly, but also more important. An acquirer with more information about the target, and a correspondingly more precise valuation of the target, has a competitive advantage compared to less-informed potential acquirers. Such a competitive bidding advantage can reduce competition for the target, allowing the best-informed acquirer to take over the target at a price that is advantageous to the acquirer. As more information about a potential target becomes available over time, the target valuation uncertainty declines, and potential acquirers find it easier to learn about the target. With more competition from potential acquirers, the acquisition price becomes less advantageous to the acquirer, leading to the empirical results we observe. Our study demonstrates how asymmetric information that is resolved slowly over an extended period of time after a target’s IPO plays an important role in acquisition pricing.

Sources of Funding in a Crisis: Evidence from Investment Banks

We evaluate whether liquidity shock or shocks to fundamentals explain the behavior of investment banks during financial crises. We find that most investment banks maintain funding levels during downturns. The few banks that do face funding shortfalls are the least creditworthy. Further, despite the conventional wisdom, these market makers rarely sell toxic assets at fire sale prices, instead relying on equity issuance and cherry picking of assets as alternative funding sources. We find that shocks to fundamentals, not illiquidity-induced fire sales, are better able to explain the behavior of investment banks during financial crises.

VC Valuation, Partial Adjustment, and Underpricing: Behavioral Bias or Information Production?

Using a sample of venture capital-backed firms going public, we analyze the role played by perceived valuation changes on IPO underpricing. We consider the full trajectory of perceived valuation changes in a firm’s value from its last VC round, to IPO filing, and ultimately to IPO price. We find that perceived valuation change from the last pre-IPO venture capital round to the time of IPO affects the IPO underpricing in a non-linear way. Further analysis indicates that information based theories, not behavioral biases, explain this non-linear result. We also find that the previously documented partial adjustment effect and its non-linear impact on IPO underpricing are related to the trajectory of the perceived valuation changes. Nevertheless, the lack of direct effect of behavioral bias on IPO underpricing stands in stark contrast to prior evidence that shows importance of behavioral biases in settings with many sophisticated parties.