We test the empirical implications of several models of IPO underpricng. Consistent with the winner's-curse hypothesis, we show that in markets where investors know a priori that they do not have to compete with informed investors, IPOs are not underpriced. We also show that IPOs underwritten by reputable investment banks experience significantly less underpricing and perform significantly better in the long run. We do not find empirical support for the signaling models that try to explain why firms underprice. In fact, we find that (1) firms that underprice more return to the reissue market less frequently, and for lesser amounts, than firms that underprice less, and (2) firms that underprice less experience higher earnings and pay higher dividends, contrary to the models' predictions.

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This paper investigates the effect on bank equity values of the Comptroller of theCurrency's announcement that some banks were "too big to fail" and that for those banks total deposit insurance would be provided. Using an event study methodology, we find positive wealth effects accruing to TBTF banks, with corresponding negative effects accruing to non-included banks. We demonstrate that the magnitude of these effects differed with bank solvency and size. We also show that the policy to which the market reacted was that suggested by the Wall Street Journal and not that actually intended by the Comptroller. THE ROLE OF DEPOSIT insurance has become a topic of increasing debate.Advocates argue that by removing the incentive to "run", deposit insurance protects individual financial institutions from instability in the intermediation process, thereby providing stability to the financial system as a whole.1 The recent rise in bank failures and the concomitant crises in the S&L industry, however, demonstrate that this stability is not guaranteed. Moreover, critics note that deposit insurance may introduce incentive problems and wealth effects into the financial system, both of which can impede the effective functioning of any deposit insurance system. These problems have prompted concern about the structure of the current deposit insurance system and have led to numerous proposals regarding its restructuring.2 This paper investigates one aspect of this debate by analyzing the effect on bank equity values of the policy decision to insure completely some banks but not others. Specifically, in September 1984 the Comptroller of the Currency testified before Congress that some banks were simply "too big to fail" (TBTF) and that for those banks total deposit insurance would be provided. While not explicitly naming the banks, the Comptroller admitted that this policy would apply to the eleven largest banks. Using an event study methodology, we analyze * Both authors from Johnson Graduate School of Management, Cornell University. We would like to thank William Grant of the Office of the Comptroller of the Currency and Patrick Mahoney of the Federal Reserve System for their assistance. We also gratefully acknowledge the assistance of two anonymous referees.'Diamond and Dybvig (1983) argue that the intermediation process necessitates that banks be illiquid, thus creating the potential for destabilizing bank runs. They show that deposit insurance can remove the incentive to run and thus make the system more stable. Kane (1985) and Scott (1987) argue, however, that deposit insurance itself may introduce instability by distorting incentives and by interfering with market discipline via the regulators' choice of failure rules. 2The incentive issues were noted by Merton (1977) and Buser, Chen, and Kane (1981). For proposals regarding the "too big to fail" policy and deposit insurance, see Sprague (1986). 1588The Journal of Finance the effects of this statement on the eleven included banks, as well as its impact on those banks implicit...