Contributions published at Corporate Finance Theory (Michel Habib)

We model owners as solving a multidimensional problem when taking their firms public. Owners can affect the level of underpricing through the choices they make in promoting an issue, such as which underwriter to hire or on what exchange to list. The benefits of reducing underpricing in this way depend on the owners’ participation in the offering and the magnitude of the dilution they suffer on retained shares. We argue that the extent to which owners trade off underpricing and promotion is determined by the minimization of their wealth losses. Evidence from a sample of U.S. initial public offering confirms our empirical predictions.

We view debt and outside equity as serving to elicit credible information from different specialists about the value of an enterprise in its various uses. The equity valuation specialist provides a price forecast for equity that reveals information about the value of the enterprise in its primary use. The debt valuation specialist provides a price forecast for debt that reveals information about the value of the enterprise in its alternative use. The prices forecast by the valuation specialists credibly reveal their private information because they are required to buy the associated claims at the forecast prices, thereby bonding their valuations.

We model the role various forms of nonrecourse secured debt play in efficiently redeploying assets whose value is state‐specific. Ex ante, an entrepreneur and an asset redeployer make noncontractible state‐specific investments in the primary and next‐best uses of an asset, respectively. The redeployer provides a secured nonrecourse loan equal to the value of the asset in the critical state that separates the good and bad states. In the event of a bad state, this contract averts ex post bargaining over the asset's quasi‐rents on redeployment and leaves the parties' ex ante investments undistorted.

An inverse relation between underpricing and IPO proceeds holds true because of dilution, even as uncertainty remains unchanged. The use of the inverse of IPO proceeds as a proxy for uncertainty may therefore be misleading.

We present a possible explanation for the lack of permanence of the very high levels of concentration of ownership that accompany leveraged buyouts. We first argue that some diffusion of ownership can be beneficial to the shareholders of a firm by encouraging the employees of the firm to enter into implicit contracts with the firm. The level of concentration of ownership that maximizes firm value is therefore that which trades off the well-known gains from monitoring with the gains from implicit contracting. We then argue that, in the process of concentrating the ownership of a firm that has excessively diffuse ownership to a level that maximizes firm value, investors in leveraged buyouts will choose an initial level of concentration of ownership that is very high. They will do so in order to put pressure on managers to breach existing implicit contracts. Following the breach of these contracts, investors will decrease the level of concentration of ownership to the level that maximizes firm value. There will be no further breach of implicit contracts, for such breach is incidental to the transformation of the firm from one that has excessively diffuse ownership to one that has the optimal level of diffusion of ownership. No change in the concentration of ownership therefore occurs once the level of diffusion of ownership that maximizes firm value has been attained.

We present an information-based explanation for spinoffs. When the various divisions of a firm are spun off into several firms that have separate stock market listings, the number of traded securities increases. This makes the price system more informative. It improves the quality of the investment decisions made by managers and reduces uninformed investors' uncertainty about the value of the divisions. Both effects serve to increase the sum total of the market values of the spun-off divisions above the market value of the original firm.

This article reviews static and dynamic models of information aggregation in the literature. It highlights the key assumptions these models make, the results they obtain and the issues that still need to be explored to further our understanding of information aggregation in financial markets.

This paper investigates how mortgage credit conditions affect housing markets and the demand for homeownership. Using unique data on homeowners' listings and transactions and exploiting policy-driven changes in mortgage credit conditions in China, I provide empirical evidence that tightened mortgage credit conditions have a negative effect on housing demand and prices. Estimating a structural model of households' demand and supply of residential properties, I obtain measures for market liquidity and bargaining power of home buyers and sellers and find that mortgage interest rates and down payment requirements negatively affect the value of owning residential properties. With counterfactual experiments, I quantify the impact of mortgage interest rates, down payment requirements, property tax rates, and transaction tax rates on housing demand, supply, and prices. At the cost of a welfare loss for home buyers (owners), 1 percentage point higher mortgage interest rates (property tax rates) reduce demand-supply imbalance and decrease the average transaction price by 2.3% (1.9%), which cannot be achieved with higher transaction tax rates.

null