It sounds great: cut out the investment banking fees and just offer a straight Dutch auction on the stock. After all, aren’t auctions the perfect market institution?
Co-blogger Alex thinks that the investment banks have had a comeuppance due for a long time; he may well be right.
Under standard practice, the underwriters give underpriced shares to favored investors and executives. The value of those shares rises on opening day. The insiders are happy but the company has left money on the table. In extreme and indeed pathological cases the discount can be as high as eighty percent. So why have companies tolerated this practice for so long?
Under one apologetic view, the kickbacks, underpriced shares, and payola are necessary. Someone has to produce reputation for the stock. The investment bank is paid to do this. The underwriter, in turn, gives insiders good deals to get them to boost the stock. If you own some shares you will do your best to talk up the issue. The efficient markets hypothesis? Well, it may be true at the margin, but how do we get to this margin in the first place?
I heard another point from one industry insider. Investors feel better about a stock if it goes up on day one. For the long-run good of the stock, it is important to have a price rise in the beginning. If investors sour on the stock in its early days, it may never recover its reputation.
Other skeptics wonder how the results of the auction can be predicted? How many people will show up with bids? What if we gave an auction and nobody came? Other worriers fear the temptation for untutored investors to bid too high at first, pushing the shares to unsustainable levels. After all, no single investor will have the final price much with his or her bid.
There is yet another fear. If the auction is fair, the stock will sell at roughly the same price on day one and day two. So if there is some uncertainty surrounding the initial auction, why not just hold off your buying until day two? But then how do liquid markets get established in the first place? How can you get concentrated buying interest on day one, but without violating either fairness or the efficiency of markets?
The resolution: …will have to wait for the facts and thus the actual auction. But my suspicion is the following. Some percentage of the original underpricing, but by no means all, is in fact a legitimate return to the investment banks. I thus worry that Google will not see strong demand on day one. On top of that, there is a puzzle. Unless you think all of the initial share underpricing is an legitimate fee for services rendered, why have markets tolerated this practice for so long?
By the way, David Levy informs me that used book dealer ALibris will try a share auction as well. For whatever reasons, except for Google, only small companies have shown an interest in these alternative institutions. France uses such auctions more commonly; it seems that the first-day price run-up is smaller but still present. On one hand, these other examples suggest that the auctions are a viable institution. On the other hand, it makes you wonder why the practice is not used more often.
Addendum: Here is a very good piece on the auction of Salon.com stock.
The Cannes film festival starts this week, despite a threatened labor disruption. Yesterday I learned that the term Asia Extreme, the hot style in world cinema right now, has been copyrighted. “Asia Extreme” movies view John Woo as a quaint forefather and go much further in terms of throwing the book away. Are you interested? I’ll recommend Battle Royale for horrific Hobbesian violence, and The Audition for shocking sexual drama. Both are Japanese, and neither is for the fainthearted. But if you feel jaded by most movies, a bit bored, and are looking for something conceptual, this is definitely the next step.
A table purporting to show IQ by state swept through the blogosphere last week mostly because liberal bloggers enjoyed trumpeting the high correlation it showed between high-IQ and voting for Gore in 2000. Turns out that the table was a hoax. Steve Sailer has the whole story including some real data on education by state and IQ by nation.
Have you ever wondered how America became a world leader in mass media and telecom? Paul Starr’s excellent The Creation of the Media addresses this question. Here is one good bit from the book:
French policy was…unfavorable to the telephone. Unwilling to spend public funds on the medium, the French government, beginning in 1879, granted local concessions for telephone service lasting only five years. The idea was to let the private sector assume the risk of a new business, giving the state time to see if it was worth taking over. Private capital could lose money on the telephone, but if the medium proved profitable the government would step in: a policy nicely designed to depress investment. In 1885, the government itself began building long-distance lines but limited construction so as not to cause too rapid a depreciation of its investment in the telegraph. Four years later, it nationalized the local telephone carriers as well, not so much because of a positive commitment to improve telephone service as because of a defensive concern about the erosion of the state’s telegraph monopoly…
By 1895, while the United States had one telephone for every 208 people…France [had] one for every 1,216…In 1927, while Bell was reporting an average delay of 1.5 minutes in placing long-distance calls, it took, on average, more than an hour to put through a call from Paris to Berlin.
The bottom line: Keep this story in mind the next time you hear politicians talking about the regulation of VOIP.
The researchers photographed 45 dogs and their owners at three dog parks and gathered information about the breeds and how long owners and pets had been together. They then asked 28 students to try to match the people to the pooches.
The students were able to match dogs to their owners, but only when the dogs were purebred.
“The results suggest that when people pick a pet, they seek one that, at some level, resembles them, and when they get a purebred, they get what they want,” the researchers wrote. “A nonpurebred puppy’s final appearance is unpredictable, and so the resemblance . . . should be confined to the much more predictable purebreds.”
There was no relationship between how long owners had lived with their dogs and the chance that their appearances would match.
“These results were consistent with the notion that the ability to match is due to selection rather than convergence,” they wrote. “However, it does appear that, as in the case of selecting a spouse, people want a creature like themselves.”
Here is more statistical information.
Not surprisingly, many commentators believe that we select Presidents on the same basis.
Most Americans will remember to call their mothers or send cards for Mother’s Day tomorrow, but about one in four will forget [is that the right word?] the national holiday altogether, according to a new survey.
Those who do remember Mom are expected to spend an average of $98.64 this year, according to a report by the National Retail Federation, a D.C. trade association.
The amount is slightly more than last year’s $97.37, said NRF spokeswoman Ellen Tolley.
“Mother’s Day saw a huge increase in consumer spending right after September 11, but since then it has stabilized to a gradual increase,” Miss Tolley said. In 2000 and 2001, the average spending per customer was less than $65.
Total spending for the holiday is estimated at over $10 billion. Here is the full story.
In a few days’ time, I’ll be up north in New Jersey and taking my mom (who reads this blog) out for food, movie, and museum. As for today, Yana and I are taking her mom to Thai food, the theater, and the superb Mayan exhibit at the National Gallery.
Happy Mother’s Day to all the moms!
Lately we’ve been hearing a lot about competition from Chinese manufacturing and Indian call centers. But a different kind of competition – the scramble for oil and other resources – poses a much bigger threat to our prosperity.
I am surprised to see Krugman so qualifying his former belief in the virtues of free trade. Keep in mind that the core theory of international theory is a barter theory. “The Chinese buying oil” and “the Chinese selling bicycles” are just two sides of the same coin. If you don’t think one can harm the U.S., you shouldn’t, in general, think the other will harm the U.S. either. (Of course if your vision of free trade is we get the bicycles but give up nothing in return, we are worse off relative to that state of affairs!)
Here is another way to think of the logic. If the Chinese are bidding up the price of oil, they have found good uses for that resource. If they have a comparative advantage in buying oil, that benefits the rest of the world. Comparative advantage in production also will mean comparative advantage in buying certain inputs. The U.S. still has access to its previous production possibilities frontier. It must now decide whether it would rather spend its money on oil, or on something else, perhaps the outputs of the Chinese.
This analysis, of course, requires qualification. For instance Chinese uses of oil are often more polluting than American uses. This is a valid cause for concern. Distribution and transition effects can delay or modify the benefits of free trade. Some relative price shifts can occasion greater external effects than others. Theoretical economists also will recognize cases of “increasing returns” and “strategic trade policy” as providing possible exceptions to the benefits of free trade. Krugman in the past, of course, has stressed that these exceptions are unlikely to prove policy relevant.
But put all of these complicated cases to the side. The “first cut” approach to the problem should suggest that Chinese oil purchases, viewed in their proper general equilibrium terms, do not make the rest of the world worse off.
Addendum: Here is critical commentary from the ever-intelligent Randall Parker.
Raise male wages. Most prostitutes must forego or postpone marriage, because most men do not want to marry a prostitute. The more appealing the marriage prospects, the lower the relative return to prostitution. Andrew David Chamberlain gives more analysis, and links to the relevant research.
Thanks to Michael of www.2blowhards.com for the pointer. I”ll also note I enjoyed his recent survey of conservative and libertarian thought in the blogosphere, not the least because he had nice words for Alex and me.
The Economists’ Quartet is a card game about economists made by economists for economists. Its aim is twofold: it is designed to make students interested in the life of contemporary and former economists and their most important ideas, as well as be an entertaining pastime for ´grown-up´ post graduate economists.
I was privileged to take the Washington-Trenton train, round trip, over the last two days. As you may know, this route takes you past some of America’s most spectacular industrial decay. (I recommend bringing Philip Glass music on CD with headphones; it makes your trip feel like the Koyaanisqatsi movie, experienced live.)
Some Europeans might regard the decay as reflecting our economic weakness. But they have it backwards: our willingness to let industries decline is a significant source of our economic strength. A country with no declining industries is a country that doesn’t have many better new ideas.
Here is a New York Times article about how the French are having a hard time accepting deindustrialization.
“[The French are] fighting against windmills – the process of disindustrialization is inevitable,” said Daniel Gros, director of the Brussels-based Center for European Policy Studies. “Those countries who slow that process pay. The problem is not that there is disindustrialization in France, but that it isn’t happening fast enough.”
Not suprisingly, the French are looking toward subsidies to slow down these changes. Here is an excellent article on just how much of American productivity growth comes from allowing losing sectors to decline.
Currently a U.S. dollar buys 555 Iraqi dinar. You can track the fluctuating price at this web site. Perhaps over time they will develop forward contracts contingent on major events. This might include the election, or perhaps the resignation of various high government officials?
By the way, if you think you understand what is going on in Iraq, you can trade in the market.
And try this site if you wish to compare prices. How is this for a marketing line?
After decades of underinvestment, Iraq’s agriculture sector is poised to make the country once again the bread basket of the Middle East
In the President’s radio address, President Bush reconfirmed the Adminstrations stance for a “Strong Dinar Policy”. The new dinar will be used throughout Iraq, thereby unifying the economy and the country.
Another site suggests:
According to recent releases by the US Department of State, the economic recovery of Iraq is in process and occuring quickly.
I’m glad to hear that. As is commonly the case in new markets, it is easier to go long than short.
For the past three months E-Loan has offered customers a choice, process their loan paperwork in 12 days using all-domestic workers or 10 days by bringing on some workers in India – 90% chose the quicker turnaround.
Cato Journal devotes a special issue to this marvelous book, co-authored with Anna Schwartz. Contributors to this symposium include Friedman, Schwartz, Allan Meltzer, William Poole, and Bennett McCallum. Of course Friedman’s monetary explanation of the Great Depression, radical in its time, is now part of the mainstream. And I see this book as providing a better statement of Friedman’s true method than his classic “The Methodology of Positive Economics.” His judicious and non-formulaic mixture of theory, empiricism, and history remains a classic account of how economic science can contribute to human knowledge. Friedman was never a naive positvist. His real method is that of consilience, and reaching a sophisticated reflective equilibrium of historical and theoretical understanding. It is sad that this book, with its low-tech statistics, would probably no longer pass as a Ph.d. dissertation at the University of Chicago.