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Over-allotment arrangements are nowadays part of almost any initial public offering. The underwriting banks borrow stocks from the previous shareholders to issue more than the initially announced number of shares. This is combined with the option to cover this short position at the issue price. We present empirical evidence on the value of these arrangements to the underwriters of initial public offerings on the Neuer Markt. The over-allotment arrangement is regarded as a portfolio of a long call option and a short position in a forward contract on the stock, which is different from other approaches presented in the literature.
Given the economically substantial values for these option- like claims we try to identify benefits to previous shareholders or new investors when the company is using this instrument in the process of going public. Although we carefully control for potential endogeneity problems, we find virtually no evidence for a reduction in underpricing for firms using over-allotment arrangements. Furthermore, we do not find evidence for more pronounced price stabilization activities or better aftermarket performance for firms granting an over-allotment arrangement to the underwriting banks.
EFM Classification: 230, 410
Die Pleitewelle in Deutschland steuert nach Angaben des Bundesverbandes Deutscher Inkasso-Unternehmen (BDIU) auf einen neuen Höchststand zu. Für 2003 erwartet der Verband bereits zum vierten Mal in Folge sowohl bei Unternehmens- als auch Verbraucherinsolvenzen Rekordmarken: Die für 2003 geschätzten 40 000 Unternehmenspleiten (zuzüglich weiterer 58 000 Pleiten von Selbstständigen und Privaten) mit einem zu erwartenden volkswirtschaftlichen Gesamtschaden von über 50 Milliarden Euro tragen erheblich zur schlechten Stimmung in Deutschland bei. Diese Zahlen verdeutlichen auch, wie außerordentlich wichtig ein modernes Insolvenzrecht ist, das neben dem Gläubigerschutz auch der möglichen Sanierung eines Unternehmens Rechnung trägt.
This chapter focuses on institutional investors in the German financial markets. Institutional investors are specialized financial intermediaries who collect and manage funds on behalf of small investors toward specific objectives in terms of risk, return and maturity. The major types of institutional investors in Germany are insurance companies and investment funds. We will examine the nature of their businesses, their size and role in the financial sector, the size and the composition of the assets under their management, aspects of financ ial regulation, and features of their asset-liability-management.
The paper analyses the effects of three sets of accounting rules for financial instruments - Old IAS before IAS 39 became effective, Current IAS or US GAAP, and the Full Fair Value (FFV) model proposed by the Joint Working Group (JWG) - on the financial statements of banks. We develop a simulation model that captures the essential characteristics of a modern universal bank with investment banking and commercial banking activities. We run simulations for different strategies (fully hedged, partially hedged) using historical data from periods with rising and falling interest rates. We show that under Old IAS a fully hedged bank can portray its zero economic earnings in its financial statements. As Old IAS offer much discretion, this bank may also present income that is either positive or negative. We further show that because of the restrictive hedge accounting rules, banks cannot adequately portray their best practice risk management activities under Current IAS or US GAAP. We demonstrate that - contrary to assertions from the banking industry - mandatory FFV accounting adequately reflects the economics of banking activities. Our detailed analysis identifies, in addition, several critical issues of the accounting models that have not been covered in previous literature. December 2002. Revised: June 2003. Later version: http://publikationen.ub.uni-frankfurt.de/volltexte/2005/1026/ with the title: "Accounting for financial instruments in the banking industry : conclusions from a simulation model"
This paper proposes an intertemporal model of venture capital investment with screening and advising where the venture capitalist´s time endowment is the scarce input factor. Screening improves the selection of firms receiving finance, advising allows firms to develop a marketable product, both have a variable intensity. In our setup, optimal linear contracts solves the moral hazard problem. Screening however asks for an entrepreneur wage and does not allow for upfront payments which would cause severe adverse selection. Project characteristics have implications for screening and advising intensity and the distribution of profits. Finally, we develop a formal version of the "venture capital cycle" by extending the basic setup to a simple model of venture capital supply and demand.
This paper analyses the effects of the Initial Public Offering (IPO) market on real investment decisions in emerging industries. We first propose a model of IPO timing based on divergence of opinion among investors and short-sale constraints. Using a real option approach, we show that firms are more likely to go public when the ratio of overvaluation over profits is high, that is after stock market run-ups. Because initial returns increase with the demand from optimistic investors at the time of the offer, the model provides an explanation for the observed positive causality between average initial returns and IPO volume. Second, we discuss the possibility of real overinvestment in high-tech industries. We claim that investing in the industry gives agents an option to sell the project on the stock market at an overvalued price enabling then the financing of positive NPV projects which would not be undertaken otherwise. It is shown that the IPO market can however also lead to overinvestment in new industries. Finally, we present some econometric results supporting the idea that funds committed to the financing of high-tech industries may respond positively to optimistic stock market valuations.
Equal size, equal role? : interest rate interdependence between the Euro area and the United States
(2003)
This paper investigates whether the degree and the nature of economic and monetary policy interdependence between the United States and the euro area have changed with the advent of EMU. Using real-time data, it addresses this issue from the perspective of financial markets by analysing the effects of monetary policy announcements and macroeconomic news on daily interest rates in the United States and the euro area. First, the paper finds that the interdependence of money markets has increased strongly around EMU. Although spillover effects from the United States to the euro area remain stronger than in the opposite direction, we present evidence that US markets have started reacting also to euro area developments since the onset of EMU. Second, beyond these general linkages, the paper finds that certain macroeconomic news about the US economy have a large and significant effect on euro area money markets, and that these effects have become stronger in recent years. Finally, we show that US macroeconomic news have become good leading indicators for economic developments in the euro area. This indicates that the higher money market interdependence between the United States and the euro area is at least partly explained by the increased real integration of the two economies in recent years.