Josef Zechner

IPO-mechanisms, monitoring and ownership structure

This paper analyzes the e⁄ect of di⁄erent IPO mechanisms on the structure of share ownership and explores the role of underpricing and rationing in determining investors’ shareholdings. We focus on the agency problem that results when large institutions are the only investors capable of monitoring the firm whereas small shareholders free-ride on these activities. The major conclusion is that some well-known aspects of IPOs may be explained as rational responses by the issuer to the existence of regulatory constraints in public capital markets. There is a two-stage o⁄ering mechanism in which the investment banker, acting in the interests of the issuer, optimally rations the allotment of shares to small investors in order to capture the benefits associated with better monitoring by institutions. Importantly, in our model, the existence of underpricing (and oversubscription) is an indication that the issuer has received a higher ex ante price than would have been obtained through a competitive Walrasian-type o⁄ering process. ( 1998 Elsevier Science S.A. All rights reserved. JEL classification: G24; G32; G38

What makes stock exchanges succeed? Evidence from cross-listing decisions

Despite the increasing integration of capital markets, geography has not yet become irrelevant to finance. Between 1986 and 1997, European public companies have increasingly listed abroad, especially in the U.S. We relate the cross-listing decisions to the characteristics of the destination exchanges (and countries) relative to those of the home exchange (and country). European companies appear more likely to cross-list in more liquid and larger markets, and in markets where several companies from their industry are already cross-listed. They are also more likely to cross-list in countries with better investor protection, and more efficient courts and bureaucracy, but not with more stringent accounting standards.

The Role of Debt and Perferred Stock as a Solution to Adverse Investment Incentives

We analyze the optimal mix of debt, common equity, and preferred equity in a model with an investment opportunity and asymmetric information about its quality, and show that an all-equity financed firm will overinvest. Issuing the appropriate amount of debt before the project becomes available resolves this overinvestment problem. Introducing a second motive for debt, such as taxes, leads to a role for preferred stock as a means of enhancing the firms “debt capacity,†by creating additional incentives to invest. We derive an optimal capital structure involving debt, preferred stock, and common stock.

Bank capital regulation with random audits

We consider a model of optimal bank closure rules (cum capital replenishment by banks), with Poisson-distributed audits of the banks asset value by the regulator, with the goal of eliminating (ameliorating) the incentives of levered bank shareholders/managers to take excessive risks in their choice of underlying assets. The roles of (tax or other) subsidies on deposit interest payments by the bank, and of the auditing frequency are examined.

The Geography of Equity Listing: Why Do European Companies List Abroad?

This paper documents the aggregate trends in the foreign listings of companies and analyzes both their distinctive pre-listing characteristics and their post-listing performance relative to other companies. In the 1986-97 interval, many European companies listed abroad, but did so mainly on US exchanges. At the same time, the number of US companies listed in Europe decreased. The cross-listings of European companies appear to have sharply different motivations and consequences depending on whether they cross-list in the United States or within Europe. In the first case, companies pursue a strategy of rapid expansion fuelled by high leverage before the listing and large equity issues after the listing. They rely increasingly on export markets both before and after the listing, and tend to belong to high-tech industries. In the second case, companies do not grow more than the control group, and increase their leverage after the cross-listing. Also, they fail to increase their foreign sales in the wake of the cross-listing. The only common features of the two groups are their large size, high foreign sales before cross-listing and high R&D spending after cross-listing.

Credit Risk and Dynamic Capital Structure Choice

This Paper analyses the effect of dynamic capital structure adjustments on credit risk. Firms may optimally adjust their leverage in response to stochastic changes in firm value. It is shown that capital structure dynamics lower optimal initial leverage ratios but increase both fair credit spreads and expected default probabilities for moderate levels of transactions costs. Numerical examples demonstrate that expected default frequencies do not decrease monotonically in the traditional distance to default measure. The magnitude of the effect of capital structure dynamics depends on firm characteristics, such as asset volatility, the growth rate, the effective corporate tax rate, debt call features and transactions costs. We find that the underestimation of credit spreads and expected default frequencies is exacerbated when the risk-adjusted drift of the underlying stochastic process is inferred from a model which ignores the opportunity to recapitalize. Finally it is shown that the Value-at-Risk of corporate bonds increases with the distance to default (DD) both for very low and for very high values of DD, whereas, it decreases for intermediate values.

Market valuation of bank assets and deposit insurance in Canada

The authors examine a sample of Canadian banks and use option pricing theory to infer the market value of a banks assets from the observed market value and volatility of its equity. They find that market value estimates are significantly different from corresponding book values. These differences vary significantly across banks, suggesting that market values provide bank-specific information not found in book values. They also derive the risk-adjusted deposit insurance premia for these banks. The results suggest that the current flat-rate deposit insurance premium system has resulted in significant cross subsidization among banks.

Dynamic Recapitalization Policies and the Role of Call Premia and Issue Discounts

In a dynamic framework, the advantage of leverage depends upon the firms recapitalization policy. We show that if bonds are callable at par, then equityholders have an incentive to recapitalize too early. Call premia and issue discounts, however, mitigate the agency problem of early recapitalization. The model provides the optimal call premium and issue discount as a function of firm-specific characteristics. An analysis of a bond sample supports the models prediction that the optimal call premium is positively related to firm risk.

Debt Maturity and the Dynamics of Leverage

This paper shows that long debt maturities eliminate equity holders’ incentives to reduce leverage when the firm performs poorly. By contrast, short debt maturities commit equity holders to such leverage reductions. However, shorter debt maturities also lead to higher transactions costs when maturing bonds must be refinanced. We show that this tradeoff between higher expected transactions costs against the commitment to reduce leverage when the firm is doing poorly motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt.

The critical implicit tax rate and capital structure

In a Miller world firms are indifferent between debt and equity when the tax rate that isimplicitly used to price a bond is equal to the statutory corporate tax rate. In this paper we derive the implicit tax rate that makes a firm marginally indifferent between debt and equity when debt related tax savings are uncertain. We analyze the functional relationship between this critical tax rate and the amount of debt issued by a firm and discuss the implications for a firms optimal capital structure.