In our previous analysis when we studied the mechanics on the pricing with the use of the winner's curse model, we clearly started to deal with private information. And you might say, well, you are crazy about private information. You are really obsessed about that. Well, now I'd like to, well not to fight, but to protect my position a bit by saying, there is significant empirical evidence that supports the idea that private information does play a significant role in the process of underwriting. And to do so, we will study some empirical evidence, Yeah, and we will study that in a qualitative form. I will not put up numbers here on this loop chart. But I will just compare and say what is great and what is less. Well first of all, we compare the issues of bonds versus stocks. And again here we talk about empirical evidence with respect to underpricing. So, What do you think, where the underpricing is likely to be higher? Well, if our model private information is true then we expect that to be for stocks. Because you know that for bonds we do have many uncertains, but bonds are much less risky than stocks in general with some exceptions of a very advanced adoption containing bonds, we'll study that the issue separately. Why? Because bond holders are the first in line for residual cash flows of the issuer and stockholders are last in this line. So basically, they can enjoy greater returns, but they also take up a lot more risks. And we know that bond cash flows are written in the contract, so they are very likely to occur. The only cases when investors do not get this cash is over the default of this bond, which is an event that is not completely unrealistic, but in most cases is quite unlikely. While with the stock, there is no assurance whatsoever given to the investor that they either see this growth or they would be sort of guarded against a loss. So people are taking greater risk here. Indeed, it has been equivocally shown that, on average, in bond issues and in stocks issues, the level of underpricing is completely different. It's much higher for the stocks. Well, we can proceed and say, well, how about comparing stocks for different industries, and we will compare industrials or, Versus utilities. Well, utilities are companies that are providing electricity, heat, water. So these companies, they oftentimes are highly regulated. The demand for their services is quite well known. And therefore the cash flows are much more predictable. So we would say that there's less risk associated with that. And if a utility goes public, then you can expect that the investors are willing to put up with a much lower underpricing. So they pay a higher price. Indeed, this is the case. So I have to put that, with a plus sign I will show where underpricing is higher. It's higher for the stocks. And here, it's higher for industrials. Because for utilities it's lower. And that indeed is consistent with our overall view on the role of private information. And now we will another study. We will say, how about the timing of the issue? So here, we would discuss the so-called shelf registration. What is that? The process of placing security is a lengthy process that involves quite a bit of analysis, due diligence, information and so on and so forth. And in this process you prepare certain documents. And imagine that you would say, well, I would prepare all the necessary documents in this prospectus of an issue. When it's, well, let's say now. But then, I will put it on the shelf and wait. And I will wait and I will actually go ahead and implement the issue when I'd like to do so. Well, clearly in this case I have as an issuer. I have let's say an option to do that when it's more convenient and therefore more profitable for me. Then the investors say, if I have this ability then they are at a disadvantage. And so their underpricing is likely to be much higher. And indeed, what is seen is that stocks are almost never issued with the use of shelf registration. Because if you do that with stocks, then the moment when you go ahead with that may involve so much uncertainty and risk for me as an investor that my underpricing will be so huge that the issuer is not in the position to like this. However with bonds, that happens quite often. Because all bond parameters are quite well known, and so your freedom in choosing the right moment is significantly limited. And therefore investors say well fine, here they just did some paperwork ahead, and they do not have that much of an advantage if they choose the moment. And indeed, it will show that shelf registration is okay for bonds, And rare for stocks. That again, supports the idea of private information because clearly if you go ahead with the issue when you would like to do so. That is extremely valuable for you and therefore, this is risky and produces a potential loss for the people who buy this issue from you. So we can see that the empirical evidence that has been observed in the Unites States over many decades of studying IPOs. That supports the general idea that we do indeed deal with the issue of private information here, and we're not just obsessed, but we're talking about something that is indeed observed in reality.
