Yiming Qian

Endogenous Entry and Partial Adjustment in IPO Auctions: Are Institutional Investors Better Informed?

Using a unique dataset of complete bid information for every IPO auction in Taiwan during 1995--2000, we examine the behaviors and returns of two groups--institutional and retail investors--in a setting in which underwriters do not have pricing or allocation discretion. We find that the bids of institutional investors are generally consistent with the predictions of IPO auction theory for informed bidders, while those of individual investors are not. Specifically, returns are higher when more institutional investors enter the auction or bid higher prices, suggesting institutional investors are informed and are also able to shave bids adequately. However, individual investors as a group exhibit return-chasing behavior, are uninformed, and systematically overbid. The Author 2009. Published by Oxford University Press [on behalf of The Society for Financial Studies]. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections

We analyze IPO activity under political uncertainty surrounding gubernatorial elections in the U.S. There are fewer IPOs originating from a state when it is scheduled to have an election. To establish identification, we develop a neighboring-states method that uses bordering states without elections as a control group. The dampening effect of elections on IPO activity is stronger for firms with more concentrated businesses in their home states, firms that are more dependent on government contracts (particularly state contracts), and harder-to-value firms. This dampening effect is related to lower IPO offer prices (hence higher costs of capital) during election years.

Regulation, Subordinated Debt, and Incentive Features of CEO Compensation in the Banking Industry

We study CEO compensation in the banking industry by considering banks’ unique claim structure in the presence of two types of agency problems: the standard managerial agency problem and the risk-shifting problem between shareholders and debtholders. We empirically test two hypotheses derived from this framework: that the pay-for-performance sensitivity of bank CEO compensation (1) decreases with the total leverage ratio and (2) increases with the intensity of monitoring provided by regulators and nondepository (subordinated) debtholders. We construct an index of the intensity of outsider monitoring based on four variables: the subordinated debt ratio, subordinated debt rating, nonperforming loan ratio, and BOPEC rating (regulators’ assessment of a bank’s overall health and financial condition). We find supporting evidence for both hypotheses. Our results hold after controlling for the endogeneity among compensation, leverage, and monitoring; they are robust to various regression specifications and sample criteria.

Pre-Market Trading and IPO Pricing

Studying the only mandatory pre-IPO market in the world—Taiwan’s Emerging Stock Market (ESM)—we document that pre-market prices are very informative about post-market prices and that informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before an initial public offering explains about 90% of the variation in the offer price-earnings ratio. However, the average IPO underpricing level remains high, at 55%, suggesting that agency problems between underwriters and issuers can lead to excessive underpricing, even with little valuation uncertainty. Also, regulations impact the relative bargaining power of players and therefore IPO pricing.Received June 4, 2014; accepted April 13, 2016 by Editor Andrew Karolyi.

Hometown Biased Acquisitions

We show that CEOs exhibit home bias in acquisitions. Firms are over twice as likely to acquire targets located in their CEOs’ home states than similar targets domiciled elsewhere. Private home state deals under-perform other private deals and the bias is strongest when acquirer governance is lax, suggesting that CEOs acquire private targets for their own benefits. In contrast, public home-state acquisitions are value-enhancing. The results suggest CEOs create value in public home state acquisitions by avoiding extremely poor deals and through synergies driven by efficient integration. We conclude that both agency issues and hometown advantages drive home state acquisitions.

R&D Spillover and Predictable Returns

We show that firms’ R&D activities can predict the stock returns of their industry peers. When an industry experiences substantial R&D growth driven by the activities of a small group of firms, industry peers experience positive abnormal returns and abnormal operating performance despite having no aggressive R&D growth. Exogenous industry shocks to demand or productivity do not explain these results. Further, abnormal returns are concentrated in peer firms that receive low investor attention.

Do Efficient Firms Make Better Acquisitions

Corporate control theory suggests mergers and acquisitions protect shareholder value by allowing good managers to take control of the assets of bad managers. It therefore predicts (1) the acquisitions of poorly-managed targets by well-managed bidders will create more value than other acquisitions, and (2) the target CEO is more likely to be replaced when well-managed firms acquire poorly-managed firms. We examine these predictions. We measure how well a firm is managed using frontier efficiency analysis – the method compares the output of each firm to that of a hypothetical best-performing firm with the same inputs and characteristics as the original firm. We find: (1) the market reacts more positively to acquisitions of efficient firms. (2) Acquisitions by efficient firms are more likely to be all-cash deals and less likely to be all-equity deals. (3) The wealth gains to both the target and the acquirer improve as the efficiency difference between the acquirer and the target increases. (4) The target CEO is less likely to be retained by the merged firm when the efficiency difference increases. (5) The market reacts more negatively to target CEO retention when the target is less efficient than the acquirer.

Business Cycles, Firm Size and Market Reactions to News

Previous studies document that market reactions to firm-level earnings news are stronger during good times than in bad times. We find that this result is driven by small firms. In fact, the market reaction to large firms earnings news is weaker during economic expansions than contractions. We then investigate five possible explanations. We find that the size effect on time-varying market reaction to news cannot be explained by the distinction between value and growth stocks, the entry and exit of new firms into the economy, earnings management, or time-varying earnings persistence. There is some evidence consistent with time-varying investor attention, but investor attention does not appear to completely explain our results. Our findings, therefore, remain a puzzle.