On the optimality of capital allocation in equity markets / Leonid Spesivtsev.

Spesivtsev, Leonid, author.
ix, 72 leaves : illustrations ; 29 cm
[Philadelphia, Pennsylvania] : University of Pennsylvania, 2016.

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In this work I study efficiency of capital allocation in markets populated by a number of agents making investment decisions independently of each other. I show that under a very broad set of assumption, the aggregate amount of capital invested by the agents exceeds the socially optimal allocation of capital. Furthermore, the degree of overinvestment increases as the number of investors increases. I show that the more profitable projects exhibit a greater degree of overinvestment and result in higher losses due to overinvestment. I identify an alternative rule of allocating the surplus among investors that prevents the overinvestment problem and induces the socially optimal outcome. The overinvestment baseline is studied in detail in a general model and is then applied to a variety of settings.
The overinvestment problem is analyzed in the context of information disclosure and a choice of the socially optimal certification accuracy, where it is shown that an opaque certification policy can help alleviate the overinvestment problem and dominates an accurate certification policy. I consider a number of corollaries such as a role of financial buyers or activist investors where I show that the presence of a financial buyer who is able to reverse overinvestment and restore a socially optimal allocation of capital, provides an incentive for investors to increase the degree of overinvestment and introduces a volatility in the resulting allocation of capital. In another application of the overinvestment framework, I look at the role of the underwriters and compare direct public offerings and raising funds using an underwriter.
I also propose a new explanation for underpricing of initial public offerings in a model where a firm generates an uncertain future value and an investor chooses whether to become informed about the realization of the future value of the firm. If the investor chooses to become informed and observes the realization of the payoff, the issue will be purchased only if the payoff exceeds the offering price. The firm anticipates that the IPO may not succeed if the payoff turns out to be of a low quality and chooses to underprise the issue in order to prevent information acquisition by investor and to make the issue sufficiently attractive, ensuring the success of the IPO.
Ph. D. University of Pennsylvania 2016.
Department: Finance.
Supervisor: Bilge Yilmaz.
Includes bibliographical references.
Yilmaz, Bilge, degree supervisor, degree committee member.
Levit, Doron, degree committee member.
Opp, Christian, degree committee member.
University of Pennsylvania. Department of Finance, degree granting institution.