The role of investment banks in IPOs and incentives in firms [Elektronische Ressource] : essays in financial and behavioral economics / vorgelegt von Björn Bartling

Bartling, Leder Björn

Informations

• Publié par: ludwig-maximilians-universitat_munchen
• Publié le: 01 janvier 2004
• Nombre de lectures: 7
• Langue: English

Extrait

The Role of Investment Banks in IPOs
and Incentives in Firms
Essays in Financial and Behavioral Economics
Inaugural-Dissertation
zur Erlangung des Grades
Doctor oeconomiae publicae (Dr. oec. publ.)
an der Ludwig-Maximilians-Universit˜at Munc˜ hen
2004
vorgelegt von
Bj˜orn Bartling
Referent: Prof. Dr. Klaus M. Schmidt
Korreferent: Prof. Sven Rady, Ph.D.
Promotionsabschlussberatung: 21. Juli 2004Acknowledgements
First and foremost I would like to thank my supervisor Klaus Schmidt. This thesis
would not have been possible without his superb support, guidance, and encourage-
ment. I am also much indebted to my co-authors Andreas Park and Ferdinand von
Siemens. The joint work with both of them was and continues to be a great source of
inspiration and motivation.
Just as much I would like to thank my colleagues Brigitte Gebhard, Georg Geb-
hardt, Florian Herold, and Susanne Kremhelmer. They all contributed in many ways
to the completion of this thesis and provided an inspiring and very pleasurable envi-
ronment at the Seminar fur˜ Wirtschaftstheorie. I received comments and suggestions
from many other friends and colleagues. My thanks extend to all of them { even more
so as they are too numerous to be all mentioned in name at this point.
Finally, I would like to thank the Faculty of Economics and Politics at Cambridge
UniversityandWolfsonCollegeCambridgeforhostingmeasavisitingPh.D.studentin
the academic year 2000/01. Financial support from the European Commission, grant
no. HPMT-CT-2000-00056, is gratefully acknowledged.Contents
Preface 1
1 IPO Pricing and Informational E–ciency: The Role of Aftermarket
Short Covering 14
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.2 The Benchmark: Ofier Prices Absent Aftermarket Short Covering . . . 18
1.2.1 The Model Ingredients and Agents’ Best Replies . . . . . . . . . 18
1.2.2 Derivation of the Separating Equilibrium . . . . . . . . . . . . . 24
1.2.3 An Intuitive Characterization of the Equilibrium. . . . . . . . . 27
1.3 The Impact of Aftermarket Short Covering . . . . . . . . . . . . . . . . 29
1.3.1 Overview of Short Covering and a Bank’s Strategy . . . . . . . 29
1.3.2 Equilibrium Analysis . . . . . . . . . . . . . . . . . . . . . . . . 30
1.3.3 How would the result change without signaling? . . . . . . . . . 34
1.4 Payofi Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
1.4.1 Payofi Comparison for the Investment Bank . . . . . . . . . . . 35
1.4.2 Payofi for Issuer and Investors . . . . . . . . . . . . 38
1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1.6 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
1.6.1 Aftermarket Price Formation . . . . . . . . . . . . . . . . . . . 43
1.6.2 Threshold Prices . . . . . . . . . . . . . . . . . . . . . . . . . . 44
1.6.3 Approximate Closed Form Solutions . . . . . . . . . . . . . . . 46
1.6.4 Maximal Reputation Costs . . . . . . . . . . . . . . . . . . . . . 48
1.6.5 Omitted Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . 49CONTENTS ii
2 InvestmentBankCompensationinVentureandNon-VentureCapital
Backed IPOs 54
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
2.2 A Stylized Model of the IPO Procedure . . . . . . . . . . . . . . . . . . 58
2.3 Investment Banks’ Equilibrium Price Choice . . . . . . . . . . . . . . . 64
2.3.1 Uninformative Spreads or Spreads Re ecting the Issuer’s Inde-
pendent Signal . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
2.3.2 Spreads Re ecting the Issuer’s Identical Signal . . . . . . . . . . 68
2.4 The Issuer’s Strategic Choice of the Spread . . . . . . . . . . . . . . . . 69
2.4.1 Equilibrium Spreads if the Issuer is Uninformed . . . . . . . . . 69
2.4.2 Spreads if the Issuer is Independently Informed . . 73
2.4.3 Equilibrium Spreads if the Issuer is Identically Informed . . . . 75
2.5 Results and Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . 76
2.5.1 Positive Proflts for Investment Banks . . . . . . . . . . . . . . . 77
2.5.2 VC Issuers set Lower Spreads than Non-VC Issuers . . . . . . . 78
2.5.3 Strong Commercial Banking Ties . . . . . . . . . . . . . . . . . 79
2.5.4 Underpricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
2.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
2.7 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
2.7.1 Aftermarket Price Formation . . . . . . . . . . . . . . . . . . . 82
2.7.2 Threshold Prices . . . . . . . . . . . . . . . . . . . . . . . . . . 83
2.7.3 Approximate Closed Form Solutions . . . . . . . . . . . . . . . 85
2.7.4 Omitted Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
3 Working for Today or for Tomorrow: Incentives for Present-Biased
Agents 100
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
3.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
3.2.1 Present-Biased Preferences and Beliefs . . . . . . . . . . . . . . 103
3.2.2 Multi-Tasking with Immediate and Delayed Beneflts. . . . . . . 105CONTENTS iii
3.2.3 Combining Present-Biased Preferences and Multi-Tasking . . . . 106
3.2.4 Benchmark: Incentives for Time-Consistent Agents . . . . . . . 107
3.2.5 Incentives for Sophisticated Agents . . . . . . . . . . . . . . . . 109
3.2.6 Incentives for Naive Agents . . . . . . . . . . . . . . . . . . . . 111
3.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
4 Inequity Aversion and Moral Hazard with Multiple Agents 120
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
4.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
4.2.1 Projects, Efiort, and Probabilities . . . . . . . . . . . . . . . . . 124
4.2.2 Preferences: Risk- and Inequity Aversion . . . . . . . . . . . . . 125
4.3 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
4.3.1 Benchmark: The Single Agent Case . . . . . . . . . . . . . . . . 127
4.3.2 The Two Agents Case . . . . . . . . . . . . . . . . . . . . . . . 129
4.4 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
4.4.1 Inequity Aversion Renders Team Contracts Optimal . . . . . . . 134
4.4.2 Inequity Aversion Causes Additional Agency Costs . . . . . . . 135
4.4.3 Inequity Aversion and E–ciency . . . . . . . . . . . . . . . . . . 138
4.5 The Nature and Size of the Firm . . . . . . . . . . . . . . . . . . . . . 144
4.6 Secrecy of Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
4.7 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
4.7.1 Rent Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . 150
4.7.2 Disutility from Being Better Ofi . . . . . . . . . . . . . . . . . . 151
4.7.3 Status Seeking . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
4.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
4.9 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Bibliography 159Preface
This dissertation is comprised of two parts. Chapters 1 and 2 address the role of in-
vestmentbanksininitialpublicofierings. Chapters3and4analyzeincentiveprovision
when agents are subject to a ‘behavioral bias’.
In Chapter 1 we model the procedure of an initial public ofiering (IPO) as a sig-
naling game and analyze how the possibility of potentially profltable trading in the
aftermarket in uences pricing decisions by investment banks. When maximizing the
sum of both the gross spread of the ofier revenue and proflts from aftermarket trading,
investment banks have an incentive to distort the ofier price by employing aftermar-
ket short covering and exercise of the overallotment option strategically. This results
either in informational ine–ciencies or, on average, exacerbated underpricing. Wealth
is redistributed in favor of investment banks.
In Chapter 2 we address two puzzles of the IPO literature: (1) Why do investment
banks earn positive proflts in a competitive market? And (2) Why do banks receive
lower gross spreads in VC backed IPOs? The IPO procedure is modeled as a two-
stage signaling game. In the second stage banks set ofier prices given their private
information and the level of the spread. Issuers anticipate the bank’s pricing decision
and set in the flrst stage spreads to maximize expected revenue. Investors are aware of
this process and subscribe only if their expected proflts are non-negative. As a result,
issuers ofier high spreads to induce banks to set high prices, allowing them proflts.
CompetitionmaytakeplaceinadditionalfeaturesoftheIPOcontractas, forexample,
thenumberofco-managersoranalystcoverage. Weshowthatinequilibriumsuperiorly
informed VC backed issuers impose smaller spreads.PREFACE 2
In Chapter 3 we examine self-control problems { modeled as time-inconsistent,
present-biased preferences { in a multi-tasking environment. An agent must allocate
efiort between an incentivized and immediately rewarded activity (e.g. efiort at the
workplace) and a private activity that pays out onl