Applications of Structural Estimation to Finance

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Hyatt Regency Chicago, Grand Suite 3
Hosted By: American Economic Association
  • Chair: Toni Whited, University of Michigan

Entry and Exit in the Market for IPO Underwriting

Ari Kang
,
University of Texas-Austin
Richard Lowery
,
University of Texas-Austin

Abstract

Controversy surrounds the question of whether underwriters collude in the market for IPOs. Some researchers identify the pattern of spreads (Chen and Ritter, 2000) and the reliance on indirect compensation through underpricing (Kang and Lowery, 2014) as evidence for implicit collusion among underwriters. Others (Hansen, 2001) suggest that efficient contracts can explain the pattern of spreads, while the absence of obvious barriers to entry in the IPO market makes collusion unsustainable. We investigate this question by estimating the entry costs (and exit payoffs) in the IPO market. We proceed by largely following the standard procedure for structural estimation of entry costs developed in the industrial organization literature. Specifically, we apply the estimation method for continuous time entry-exit games developed in Arciadiacono, Bayer, Blevins, and Ellickson (2015). We model the payoff to completing an IPO as a direct benefit from spread income and an indirect benefit from underpricing the issue. Underwriters compete in a potentially collusive auction for IPOs that arrive according to a Poisson process which depends on economic conditions, thus generating an expected flow payoff for being in the market. Expected market share for a given underwriter depends on that underwriter's stochastically evolving reputation and an index of reputation of other active underwriters. Entry choices then identify entry costs, which provides evidence of the extent to which incumbent firms are able to exclude new competition.

Inefficiencies and Externalities From Opportunistic Acquirers

Di Li
,
Georgia State University
Lucian Taylor
,
University of Pennsylvania
Wenyu Wang
,
Indiana University

Abstract

If opportunistic acquirers can buy targets using overvalued shares, then there is an inefficiency in the merger and acquisition (M&A) market: The most overvalued rather than the highest-synergy bidder may buy the target. We quantify this inefficiency using a structural estimation approach. We find that the M&A market allocates resources efficiently on average. Opportunistic bidders crowd out high-synergy bidders in only 7% of transactions, resulting in an average synergy loss equal to 9% of the target’s value in these inefficient deals. The implied average loss across all deals is 0.63%. Although the inefficiency is small on average, it is large for certain deals, and it is larger when misvaluation is more likely. Even when opportunistic bidders lose the contest, they drive up prices, imposing a large negative externality on the
winning synergistic bidders.

QE Reverse Auctions in the United Kingdom and the United States

Lena Boneva
,
London School of Economics and Political Science
Jakub Kastl
,
Princeton University
Filip Zikes
,
Federal Reserve Board

Abstract

In response to the financial crisis, many central banks lowered policy rates to almost zero and engaged in unconventional policies such as asset purchases (“Quantitative Easing”) to stimulate their ailing economies. We aim to contribute to this literature by providing new evidence on the effects of the reverse auctions held by the Bank of England (BOE) to implement QE in the UK. We make use of a novel data set containing individual bids submitted by dealers in the QE reverse auctions run by the BOE between March 2009 and December 2014. Our data set covers both winning and losing bids, which allows us to trace out demand curves of individual bidders. We combine these data with audit-trail transactions data for individual bonds in the secondary market. Thus, we can not only see dealers’ bidding behavior in the reverse auctions, but also their trading activity in the secondary market. We investigate QE's impact on liquidity, returns and volatility. We further analyze bidders' incentives to participate in QE auctions and we also analyze and compare the impact of the US QE implementation.

Dynamic Financial Constraints: Which Frictions Matter for Corporate Policies?

Boris Nikolov
,
University of Lausanne
Lukas Schmid
,
Duke University
Roberto Steri
,
University of Lausanne

Abstract

We build, solve, and estimate a range of dynamic models of corporate investment and financing. We focus on limited enforcement, moral hazard, and tradeoff models. All models share a common technology structure, but differ in the friction generating financial constraints. Using panel data on Compustat firms for the period 1980-2015 and a more recent dataset on private firms from Orbis, we determine which features of the observed data allow to distinguish among the models, and we assess which model performs best at rationalizing observed corporate investment and financing policies across various samples. Our tests, based on empirical policy function benchmarks, favor limited commitment models for larger compustat firms, and moral hazard models for private firms.
Discussant(s)
Andrey Malenko
,
Massachusetts Institute of Technology
Haoxiang Zhu
,
Massachusetts Institute of Technology
Alexander Karaivanov
,
Simon Fraser University
JEL Classifications
  • G1 - General Financial Markets