This research proposal consists of three projects that examine issues relating to the regulation of public security offerings. Project one proposes a novel rationale for allowing price support in initial public offerings (IPOs). The project argues that engaging in price support is like giving investors a put option, and that underwriters will minimize the cost of the put by bringing less risky issues to the market, resulting in reduced underpricing. The project finds empirical support for this reasoning. This project also develops a new method for separating the effect of price support from that of deliberate underpricing in explaining the sizable positive initial returns in IPOs. Project two will empirically examine theories of financial intermediation through an analysis of direct public offerings (DPOs) over the internet, via two sets of tests. One set of tests will examine stock prices of different types of financial intermediaries around the DPO dates, to assess the manner in which different intermediaries are affected by this new mechanism of security issue. A second set of tests will examine prices at which DPOs are sold and the after-market prices at which they trade. Project three examines how securities markets are affected if banks are allowed to enter these markets. In Japan (as in the U.S.) banks were prohibited by law from underwriting corporate securities, but recently these restrictions have been relaxed. Using the Japanese institutional environment, this project will test the impact of banks entering debt markets on underwriting fees and market concentration. Vast amounts of capital are raised through public security issues (over $500 billion in 1996), and the process of issuing securities is one of the most tightly regulated aspects of capital markets. Yet, the literature provides surprisingly little guidance on the appropriate framework for setting regulations concerning the security issuance process. This research contributes in this direction. The first project focuses on the economic impact of price support regulations on the security issue process. This study is motivated by the fact that while the law allows underwriters to engage in price support -- and thereby cause securities to trade at artificially inflated prices in the after-market following a security issue - very little is understood about the economic impact of this provision on the security issue process. The second project studies a new phenomenon, that of direct public offerings (DPOs) made over the internet. DPOs are unique in that no intermediaries are involved at any stage in the offering, and therefore allow one to directly test alternative theories of financial intermediaries' role in the capital raising process and suggest a framework for regulating internet based security offerings. The third project examines the implications of allowing banks to enter the securities market using data from Japan. Such a study has policy implications for the continuing debate of the repeal of Glass-Steagall in the U.S. The POWRE grant, with its accelerated sanctions and flexibility will enable the investigator to actively pursue and complete these projects in a timely manner. These issues are important in today's environment since the regulation of securities market are currently being debated by regulators and academicians alike. It is hoped that these projects will contribute significantly to our understanding of the regulation of public security markets and financial intermediaries, and will also be relevant to policy makers. It is likely that these projects will significantly enhance this young investigator's professional standing as a researcher in the field of financial economics, and add to the contribution made by women to finance literature.
