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Essays on security offerings (Germany)

Jorg Rocholl, 2004
Faculty Advisor: Laurie Simon Hodrick
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This study analyzes the issuing process for securities in light of information asymmetries among and between issuers, underwriters, and investors. It analyzes the issuers' and underwriters' matching of allocation and demand and the resulting consequences for the investors' bidding behavior.

The first chapter uses an original data set of 41 European IPOs brought to the market by a top-tier investment bank. It makes it possible for the first time to consider demand and allocation for institutional and retail investors simultaneously and thereby to analyze all agents at all stages of the bookbuilding process. The chapter provides evidence that uninformed retail investors face a winner's curse. The underwriter has to underprice new issues on average to induce these investors to participate in IPOs. The results also suggest a quid pro quo between the underwriter and informed investors in which the latter receive favorable allocations for guaranteeing the underwriter the placement success in issues with weak demand. It cannot be shown that investors are compensated for revealing their information.

The second chapter examines the results of 93 discriminatory Treasury auctions in Germany between 1998 and 2002. It documents the seller's use of discretion and its influence on auction outcomes and bidding strategies. The evidence suggests that the seller uses its discretion frequently and substantially. It does not maximize revenues in a single-period game, but moves up in the competitive demand curve to set the market clearing price close to the market price. Therefore, bidders do not make profits in German auctions, while their bidding strategies reflect the uncertainty created by the seller's discretion. This chapter extends and tests the implications of the multi-unit auction model by Lengwiler (1999). This predicts that the market-clearing price should be independent of the bidding strategies and exclusively depend on the seller's marginal cost. The results broadly support this prediction.

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