Thomas John Walker

Leverage and IPO under‐pricing: high‐tech versus low‐tech IPOs

Purpose – The extant literature on initial public offerings (IPOs) generally assumes that a high degree of pre‐IPO leverage serves as a positive signal of firm quality as it forces a firms managers to adhere to tough budget constraints. The purpose of this paper is to question the validity of this assumption when it is indiscriminately applied to all firms, while other potentially important determinants of a firms optimal capital structure are ignored. High‐tech versus low‐tech firms are specifically focused on.Design/methodology/approach – Multivariate regression controlling is used for various firm and offer characteristics, market and industry returns, and potential endogeneity between investment bank rankings, price revisions, and under‐pricing.Findings – It is found that debt only serves as a signal of better firm quality for low‐tech IPOs, as reflected in smaller price revisions and lower under‐pricing. For high‐tech IPOs, the effect of leverage is reversed: for these firms, higher leverage is ass...

Are Investors Home Biased? Evidence from Germany

In most if not all countries the proportion of portfolio assets that investors allocate to foreign securities is clearly less than mean-variance analysis predicts. In Germany, for example, mutual funds hold only 66 percent of their investments in non-German securities while the latter represent almost 85 percent of the worldwide market value for bonds and 95 percent for equities. Even greater discrepancies exist for other financial intermediaries such as insurance companies or pension funds. Finally, the poorest portfolio diversification is exhibited by private German investors whose direct investments abroad only amount to 37 percent and 19 percent of their stock and bond holdings, respectively (for the year 2001: see Deutsche Bundesbank, 2001, 2004c).

Dynamic relationships and technological innovation in hot and cold issue markets

Purpose - The puzzle of hot and cold issue markets has attracted substantial interest in the academic community. The behavior of IPO volume and initial returns over time is well documented. Few studies, however, investigate the dynamic interrelationship between these two variables. This paper aims to fill this gap. In addition, the technological innovations hypothesis of hot issue markets is tested. Welch and Hoffmann-Burchardi suggest that the clustering of new issues is caused by IPO volume spikes in industries that have recently experienced technological innovations or favorable productivity shocks. Design/methodology/approach - This paper employs a sample of 8,160 initial public offerings filed in the USA between January 1972 and December 2001. A simultaneous equation approach is used to examine the endogenous relationship between IPO volume and initial returns. In addition, the paper analyzes the industry correlation matrix of new issue activity and estimates a fixed-effects model based on industry-level data to examine the impact of technological innovations on new issue activity. Findings - It is found that higher IPO volume causes higher initial returns, but not Research limitations/implications - As with any empirical study, the results may be sample-specific. Originality/value - The paper extends the prior literature on the relationship between IPO volume and initial returns by applying two-stage and three-stage least squares models that go beyond prior methodological approaches used in the extant literature. In addition, the paper provides some of the first empirical evidence on the effect of technological innovations and productivity shocks on IPO activity.

Recent Developments in the Aviation Insurance Industry

The aviation industry has been hard hit in recent years. While there are numerous factors that have contributed to the industrys dilemma, rising and volatile insurance premiums—particularly after the events of 9/11—have posed a particular problem for many airline managers. Despite a general trend for accident rates involving commercial passenger airplanes to decrease as aviation technology has advanced over the years and airplanes have become safer, the aviation insurance market has been far from stable. This article provides an overview of how the aviation insurance industry works and how it has changed in recent years. We take a look at how the risk is spread between insurers, how insurers treat deliberate acts of violence, and lastly, how insurers price the risk. Our article shows that the aviation insurance market has undergone considerable changes in recent years and that it has adjusted to the post‐9/11 aviation insurance realities being reasonably ready to handle events of an even more catastrophic magnitude.

Timely vs. delayed CEO turnover

This paper investigates changes in company performance following timely versus delayed CEO resignations due to financial wrongdoings. A timely resignation is proactively pushed by the company, and a delayed resignation is driven by investigations initiated by the SEC or other regulatory authorities. Our results show significant negative abnormal returns following the announcement of CEO resignations. In addition, compared with timely resignations, delayed resignations experience a larger and longer lasting negative stock market reaction. This suggests that CEO resignations due to financial wrongdoings are not perceived as good news by investors, and the delayed resignations could make investors lose more confidence, possibly because of worries about the ineffective corporate governance and supervision mechanism. We have found a significant negative relationship between CEO-chairman duality and the timeliness of CEO resignations. Our results have important implications for investors and policy makers.

Bookbuilding versus Auction Selling Methods: A Study of US IPOs

Abstract This study documents differences between two widely known IPO selling methods: the auction method and bookbuilding method for a sample of US IPOs. We employ a matched firm technique to compare the two IPO selling methods and empirically test hypotheses relating to the two selling methods. Our sample comprises all auction IPOs in the US between January 1999 and December 2004. Our results indicate that in comparison to matched bookbuilding IPOs, auction IPOs are less underpriced and thus leave less money on the table for the issuers, and have lower underwriter spreads. Relative to auction IPOs, bookbuilding IPOs are more likely to be followed and positively recommended by analysts and they receive more coverage by lead analysts, i.e. analysts affiliated with lead underwriters. Moreover, bookbuilding IPOs tend to outperform auction IPOs up to 18 months post-IPO, exhibit lower aftermarket volatility, and insiders of auction IPOs agree to lock up a higher fraction of their shares and hold them for a longer period of time.

Basel Compliance and Financial Stability : Evidence from Islamic Banks

The paper provides robust evidence that compliance with Basel Core Principles (BCPs) has a strong positive effect on the Z-score of conventional banks, albeit less pronounced on the Zscore of Islamic banks. Using a sample of banks operating in 19 developing countries, the results appear to be driven by capital ratios, a component of Z-score for the two types of banks. Even though smaller on Islamic banks, individual chapters of BCPs also suggest a positive effect on the stability of conventional banks. The findings support the effective role of BCP standards in improving bank stability, whose important implications led to the Islamic Financial Services Board (IFSB) publication of new recommendations in 2015 to bring BCP standards in line with the Core Principles for Islamic Finance Regulation (CPIFRs) standards. Our findings suggest that because Islamic banks are benchmarked closely to BCPs, the implementation of CPFIRs should also positively affect their stability.

Insider trading surrounding securities class action litigation and settlement announcements

Purpose The purpose of this paper is to investigate the trading patterns of corporate insiders, both managing and non-managing, around the announcement dates of securities class action lawsuits and related legal settlements. Design/methodology/approach The authors use market model event study methodology to examine the impact of class action litigation and settlement announcements on the stock prices of sued firms. The authors then determine the extent of abnormal insider trading surrounding such announcements by comparing insider trading activity (volume and transaction counts) to prior insider trading in the same firm, and to a matched sample of firms not experiencing such litigation announcements. A multivariate framework is utilized to provide further insight into the determinants of such abnormal insider trading. Findings The authors establish that class action litigation and settlement announcements have a significant impact on the stock prices of sued firms, and that foreknowledge of these events appears to be used by insiders to earn abnormal profits. Moreover, results indicate that managing insiders exhibit higher opportunistic abnormal trading activity than non-managing insiders. Multivariate analysis shows that size, prior firm returns, and the implementation of the Sarbanes-Oxley Act are important determinants of such insider trading. Originality/value This appears to be the first paper to analyze insider trading surrounding class action settlement announcements, and raises concerns about the ethical conduct of certain insider groups while highlighting the importance of access to private information, even amongst insiders themselves.

Do Privately Owned Enterprises in China Need Political Connections to Issue Corporate Bonds

This paper explores how political connections influence the likelihood of corporate bond issuance for privately owned enterprises (POEs) in China. Using a sample of Chinese POEs from 2007 to 2016, we show that politically connected POEs in China are more likely to issue corporate bonds as a debt financing instrument and at lower coupon rates (i.e., with lower refinancing costs). We also find that corporate bond-issuing POEs in China have weaker corporate governance. Overall, our results suggest that the corporate bond market in China is strongly influenced by political factors.

Family Control, Underwriter Prestige, and IPO Underpricing: A Cross Country Analysis

We study the relationship between underwriter prestige, family control, and IPO underpricing in an international setting. Data are collected for 5,789 firms that went public across twenty‐five countries between 1995 and 2002. We find that non‐penny‐stock and non‐U.S. IPOs from countries where firms are predominately family‐controlled benefit from associations with well‐known investment bankers; i.e., these firms are less underpriced than similar firms from countries with a low level of family control. At the same time, our findings support prior evidence that suggests that underwriter prestige is positively related to underpricing in the U.S. IPO market. Family‐controlled firms should consider the findings of this study, which identifies factors that are associated with more successful IPO outcomes.