Concerns about the negative consequences of the excessive underpricing of the current arrangement in the initial public offering (IPO) market for the provision of entrepreneurial finance—book building—have led to research into the viability of auctions for IPO pricing and allocation. IPO firms face a trade-off between the benefit of accurate and reliable IPO price discovery and the cost of underpricing. The main aim of this paper was to gain new scientific knowledge about this trade-off by measuring the impact of two key variables on this trade-off: capacity restraint and discount on the auction clearing price. Using controlled experiment methodology in multi-unit uniform price auctions we found that the most capacity-restricted auctions that also offer investors a discount are likely to produce the most accurate and reliable price discovery and consequently, the most predictable auction outcome. There are indications that a discount of 8% may suffice to incentivize investors to reliably contribute to price discovery. The resulting underpricing (and its variability) of these auctions is likely to be significantly lower than if book building would be used to price and allocate IPOs. Technological innovation in the IPO market through the application of recent advances in data science, experimental economics and artificial intelligence allows for the optimization of IPO mechanisms and crowdfunding platforms which in turn improves the access to equity required for entrepreneurial finance.
The rise of financial technology (fintech) driven business models in banking poses a challenge for financial regulators. While the positive effects on the banking sector in terms of greater diversity and competition are generally recognized and encouraged by regulators, the nature of fintech business models may increase the risk of financial instability. Regulators are exploring ways to resolve this dilemma. The paper in hand makes a contribution to the literature by providing a framework for resolving the dilemma that is evaluated in the context of the regulatory response to the rise of fintech credit in the Netherlands. The semi-structured interviews which we conducted with four senior Dutch regulators resulted in three areas that–from their perspective–required urgent action: fintech credit companies need to lower the risk of overlending, increase pricing transparency, and improve lending standards. These findings were confirmed by the results of they survey among fintech credit clients. The current regulatory response to the rise of fintech in banking in the Netherlands provides an interesting case study that delineates the features of the future regulation of fintech in banking.
Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. https://bitcoin.org/bitcoin.pdf outlined an alternative to the current monetary system in which banks are replaced by a peer-to-peer system to issue and transfer digital money: the Bitcoin. While Bitcoin has attracted a substantial investment volume, the system has not achieved the status of a viable alternative monetary system. However, the distributed ledger technology (DLT) underlying the payment system is being applied successfully by financial institutions and is likely to have important implications for the future of money and banking. In this paper we therefore focus on the most advanced distributed ledger application in the financial industry: R3 Corda. This paper is structured as follows. In the first section, we relate the debate about systems of money creation to the rise of Bitcoin. Next, the development of R3 Corda is discussed and the lessons learned for monetary reform. We conclude with an assessment of the scope and likelihood of monetary reform as a consequence of DLT applications by central banks.
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