Corporate Finance

Article excerpt

The NBER's Program on Corporate Finance met in Chicago on April 9. Mitchell A. Petersen, NBER and Northwestern University, and Paola Sapienza, Northwestern University, organized this program:

Philip Bond, University of Pennsylvania, "Optimal Plaintiff Incentives When Courts are Imperfect"

Discussant: Luigi Zingales, NBER and University of Chicago

Francesca Cornelli and David Goldreich, London Business School, and Alexander Ljungqvist, New York University, "Pre-IPO Markets"

Discussant: Kent Womack, Dartmouth College

Leora Klapper and Luc Laeven, World Bank, and Raghuram Rajah, International Monetary Fund, "Business Environment and Firm Entry: Evidence from International Data"

Discussant: Mihir A. Desai, NBER and Harvard University

Noel Maurer, Instituto Tecnologico Autonomo de Mexico, and Stephen Haber, NBER and Stanford University, "Related Lending and Economic Performance: Evidence from Mexico"

Discussant: Randall S. Kroszner, NBER and University of Chicago

Michael Greenstone, NBER and MIT; Paul Oyer, NBER and Stanford University; and Annette Vissing-Jorgensen, NBER and Northwestern University; "Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments"

Discussants: Roberta Romano, NBER and Yale University

John R. Graham, Duke University, and Krishnamoorthy Narasimhan, University of Pennsylvania, "Corporate Survival and Managerial Experiences During the Great Depression"

Discussant: Antoinette Schoar, NBER and MIT

Ayla Kayhan, University of Texas, and Sheridan Titman, NBER and University of Texas, "Firms' Histories and Their Capital Structure"

Discussant: Malcolm Baker, NBER and Harvard University

The plaintiff's incentives in a lawsuit are affected by a variety of legal rules. One example is the proportion of the fine imposed on the defendant that is awarded to the plaintiff. Another is the identity of the plaintiff" private litigants are motivated by the prospect of receiving damages, while government employees (public prosecutors or employees of regulatory agencies) instead are rewarded (if at all) by career advancement. Bond examines the interactions between court characteristics and plaintiff incentives on the deterrence provided by contracts/laws/regulations. He shows that a key determinant of the optimal level of plaintiff incentives is the extent to which a party arguing "against the facts" is able to influence the court, relative to the party arguing with the facts. When the court is more susceptible to the influential activities of the party arguing against the facts, it is generally optimal to restrict plaintiff incentives. In more general terms, Bond's study makes precise an avenue via which legal rules affect the efficacy of a legal system.

Cornelli, Goldreich, and Ljungqvist take advantage of the grey market--a "when-issued market" for shares to be issued in an IPO--to look at how behavioral biases affect prices in the post-IPO market. They develop a model in which bookbuilding and a grey market take place simultaneously. While bookbuilding extracts information from large institutions about the fundamental value of the securities, the grey market reflects the opinion of (possibly biased) retail and other small investors. When the publicly observable grey market price is high relative to fundamental value, bookbuilding investors resell shares to these smaller investors in the aftermarket. Thus, the offer price and the aftermarket price will be close to the grey market price, but will revert to the fundamental value in the long run. In contrast, when the grey market price is low, the offer and aftermarket prices will be close to fundamental value. The empirical results here confirm this asymmetry in the issue price and aftermarket prices.

Using a comprehensive database of firms in Western and Eastern Europe, Klapper, Laeven, and Rajan study how the business environment in a country drives the creation of new firms. …