Conference Agenda

Fluctuations in investor demand dramatically affect firms’ valuation and access to capital. To quantify their real impacts, we develop a dynamic investment model that endogenizes the demand- and supply-side of equity capital. Strong demand dampens price impacts of issuance, facilitating investment and financing, while weak demand encourages opportunistic repurchases, crowding out investment. We estimate the model using indirect inference by matching the endogenous relationship between investor demand and firm policies. Our estimation suggests that investor demand is an important driver of misallocation, compared with financial and real frictions and heterogeneous risk premia. Eliminating excess demand reduces dispersion in the marginal product of capital by 23.8% and productivity losses by 22.3%. With demand fluctuations, firms hold higher cash savings and tend to be larger—excess demand allows firms with financial market power to profit from financial market transactions, contributing to the emergence of superstar firms.

We present a search model that incorporates two key features of securities issuance markets: search for investors and information gathering. In the model, a seller contacts investors sequentially and uses the revealed interest to update the price of the security and to decide whether to terminate the search. We characterize the seller’s optimal strategy, which specifies how to structure the search, when to terminate the search, how to price the security, and how to allocate it to investors. We show how these choices are jointly determined and depend on the quality of investor information and search frictions. Our model provides unique predictions about offer outcomes, such as search length, security valuation, issue costs, underpricing, post-offer returns, and allocations. We find empirical support for these predictions in the setting of accelerated bookbuilt offers of seasoned equity, which involve simultaneous search and information gathering and which have become prevalent in recent years.

We present a model in which informed experts intermediate in the market for going public by acquiring private firms and reselling their shares to public investors. Because information incorporated by the public market generates resale pricing risk for experts, the acquisition prices they pay act as credible signals of firm value. Accordingly, intermediated sales provide a superior alternative for firms that expect to be undervalued in traditional IPOs. We characterize how signaling via the acquisition price affects the sharing of the surplus between the experts and the selling firms. We also analyze the co-existence of intermediated sales and IPOs and the efficiency of the resulting market equilibrium. Our analysis of intermediated sales sheds light on the possible informational roles of transactions such as SPACs and private equity investments.