Michael Willenborg

Empirical analysis of the economic demand for auditing in the initial public offerings market

This paper examines the demand for auditing in the initial public offerings (IPO) market where informational asymmetries abound. Because these asymmetries create a demand for information to help establish equity values and for market signaling to mitigate adverse selection, IPOs offer a natural setting for studying the importance of auditing. Consistent with Dye?s [1993] dual characterization of the audit as both enhancing resource allocation (an informational role) and providing investors with a claim on the auditor in the event of an audit failure (an insurance role), I test the demand for auditing arising from both informational signaling and insurance signaling. The results support both roles for auditing, though the evidence in support of an insurance signaling role seems particularly strong.

Disclosure of Intended Use of Proceeds and Underpricing in Initial Public Offerings

We use the context of a companys initial public offering (IPO) of equity securities as a capital-markets setting to empirically study the economic consequences of endogenous disclosure. In particular, we examine the relation between the extent of dollar detail an IPO issuer provides regarding their intended use of proceeds and first-day underpricing. We document substantial variation in the specificity of this disclosure and find that an increase in such specificity is associated with lower IPO underpricing. Overall, our results suggest that IPOs that provide specific use-of-proceeds disclosures have less ex ante uncertainty, in the sense that these disclosures help investors estimate the dispersion of secondary market values. Our paper contributes to the empirical accounting literature by documenting an association between voluntary disclosure and what is arguably the foremost cost of raising initial equity capital (i.e., IPO underpricing).

Analyst following and count-data econometrics

Abstract This paper reexamines the determinants of the number of analysts following a firm using econometric models based on count distributions. We replicate Bhushans (1989) analyst-following study to demonstrate the effects of using count-data econometrics, in lieu of OLS, in studying phenomena where the dependent variable ranges among nonnegative integers. In contrast with the original paper, our findings indicate the number of institutional investors is inversely related with analyst following. We also provide econometric evidence to support the preferred use of the negative binomial model in estimating cross-sectional, analyst-following regressions.

Capital gains tax rates and the cost of capital for small business: evidence from the IPO market

Abstract We examine the issue prices of small initial public offerings around the 1993 tax law change that reduced the capital gains tax on qualified small business stock. We compare the actual issue price of new stock with a benchmark price that is not affected by the change in capital gains tax. We find that, after controlling for IPO underpricing, the issue prices of qualifying small business stock after the tax rate change are significantly higher than the issue prices before the change. A control sample of nonqualifying firms shows no significant difference in issue prices.

REGULATORY SEPARATION AS A MECHANISM To CURB CAPTURE: A STUDY OF THE DECISION To ACT AGAINST DISTRESSED INSURERS

Because of state-based regulation, single-state insurers are subject to oversight by a unique, domiciliary regulator (i.e., regulatory integration), whereas in the case of multi-state insurers, regulatory responsibilities are spread across several regulators (i.e., regulatory separation). In this study, the author draws upon recent theoretical literature pertaining to incentive problems and governmental organization to motivate an empirical study of the regulatory closure decision in insurance. Specifically, the author investigates whether there is evidence of the effect of regulatory separation and, if so, whether it appears to mitigate certain capture problems in the U.S. property-liability business. For a population of distressed companies, the author finds that the likelihood of solvency-related regulatory action is significantly-positively related to the number of states in which the insurer operates, whereas there is no evidence of a negative relation between closure and size. In contrast, for distressed single-state insurers the author finds evidence of a significant-inverse relation between closure and size. For companies subject to regulatory separation, as proxied by whether they write business in more than one state, these results do not support regulatory capture in the form of leniency towards larger distressed insurers (i.e., too-big-to-fail).