Randolph P. Beatty

Investment Banking, Reputation, and the Underpricing of Initial Public Offerings

This paper develops and tests two propositions. We demonstrate that there is a monotone relation between the (expected) underpricing of an initial public offering and the uncertainty of investors regarding its value. We also argue that the resulting underpricing equilibrium is enforced by investment bankers, who have reputation capital at stake. An investment banker who ‘cheats’ on this underpricing equilibrium will lose either potential investors (if it doesn’t underprice enough) or issuers (if it underprices too much), and thus forfeit the value of its reputation capital. Empirical evidence supports our propositions.

Issuer Expenses and Legal Liability in Initial Public Offerings

Issuers of initial public offerings (IPOs) face numerous decisions, of which the selection and compensation of experts--the legal counsel, the auditor, and the investment banker--are among the most important. Our article investigates the role of the entire IPO coalition (including the legal counsel). In a comprehensive sample of 823 firm-commitment offerings from 1992 to 1994, we examine how expert compensation, IPO underpricing, and IPO underpricing uncertainty are related to (1) expert quality (we provide in the text our directly comparable ranking of the top 50 experts in each category in December 1994), (2) legal caution and liability, (3) nonlegal risk signals, and (4) one another. The results are contrasted with similar results from the 1980s.

Impact of the Penny Stock Reform Act of 1990 on the Initial Public Offering Market

The Penny Stock Reform Act of 1990 (PSRA) was an attempt to curb fraudulent security issues by placing severe restrictions on initial public offerings that were priced below

Log-Linear Stock Valuation Based on Accounting Information

5. The regulation had the cosmetic effect of reducing the number of initial public offerings priced below

Managerial Incentives, Monitoring, and Risk Bearing: A Study of Executive Compensation, Ownership, and Board Structure in Initial Public Offerings

5 but had no substantive impact on issuer quality. Delisting risk, which is a measure of issuer quality, did not decline significantly in the post‐PSRA period. Instead, abnormal returns earned by a portfolio of nonpenny stocks declined significantly in the post‐PSRA period. We present evidence that attributes the decline in abnormal returns to the migration of speculative issuers into the nonpenny range.

Auditor reputation and the pricing of initial public offerings

In this paper we provide an economic and econometric justification for using a log-linear form to estimate stock value based on accounting information. A log-linear form stands in contrast to the more traditional linear form. We state conditions under which log linear regression provides minimum variance unbiased estimates of log value as well as the appropriate transformation that yields the minimum variance unbiased estimate of value. Specification tests are suggested to infer conformity of the data to model assumptions and these are applied to a recent sample of public companies.