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Estimation risk, information asymmetry and information production in public equity offerings

Authors Tam, Hon Keung
Issue Date 2004
Summary This thesis consists of three essays on public equity offerings. A common thread that runs through these three essays is the way in which information environment affects benefits and choices of agents in the market. Essay 1 titled as 'Costs and Benefits of Bundling IPOs' examines the costs and benefits of filing earlier in an IPO wave when there are fewer IPOs in process. It shows that early movers pay higher gross spreads but their valuation is less sensitive to contemporaneous IPO market conditions. The findings extend previous studies on how bundling IPOs reduce equity issuers' cost of information production. My analysis points to a trade-off between the cost of information production and the benefit of lower price volatility of being an early mover in an IPO wave. Essay 2 is entitled 'The Effect of Underwriter Reputation and Institutional Purchase on Post-SEO Stock Performance'. Previous studies suggest that investors underreact to information contained underwriter reputation and institutional trades around equity issues. This essay examines if the relation between post-issue returns and underwriter reputation and participation of institutional investors in SEOs varies with measure of ex ante information asymmetry. It shows that SEOs led by less reputable underwriters and SEOs with low institutional purchase earn the lowest post-issue benchmark-adjusted returns. Other issuers underperform less significantly or do not underperform at all. Further analysis shows that the effects of underwriter reputation and institutional purchase on post-issue stock returns are stronger when ex ante information asymmetry is perceived to be larger. Essay 3 is entitled 'Cost of Equity Changes around Carve-out Transactions'. Equity carve-out transactions typically result in greater disclosure and more analysts following. This should lower the cost of equity of the divesting firms. The tests show that the average cost of equity of parent firms declines by about 64 basis points after carve-outs, controlling for changes in financial leverage and risk-free rate. This drop in cost of equity is greater for multi-divisional parent firms, for carve-outs that create pure-plays, and for parent firms that have greater increase in analyst coverage. A major contribution of the paper is to show that it is the decline in cost of equity, rather than expected improvement in future earnings, that generates value in equity carve-out transactions.
Note Thesis (Ph.D.)--Hong Kong University of Science and Technology, 2004
Language English
Format Thesis
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