How much of one’s wealth should one annuitize? Yaari (1965) shows that, in the absence of a bequest motive, people should use all their wealth to buy life annuities so that no wealth remains on death. The intuition is simple and robust. If the marginal utility of wealth on death is zero, then any security (such as a life annuity) that transfers wealth from states of the world in which the agent no longer exists to states in which the agent has positive utility of consumption will necessarily be attractive.
Annuities also raise important public policy concerns. The world’s largest market for private immediate pension annuities is in the United Kingdom, where the conversion of pension savings into annuities is compulsory. The case for compulsion rests at least in part on the assumed benefits of annuitization to the pensioner.
The current global financial crisis that originated in the collapse in the market for sub-prime mortgages in the United States in 2007 initially did not hit Africa directly. The crisis also had little impact on the Sub-Saharan African financial systems because the financial sector in Africa remains shallow, uncompetitive and weakly integrated into the global markets. Despite the fact that money, currencies, and capital markets had the significant pressures by the crisis, they have continued to function normally, and financial institutions in most countries have been stable without emergency support from monetary authorities.
Nevertheless, due to pressures intensified by the crisis, Sub-Saharan African countries are being hit hard as the global crisis has continued to deepen. The spiraling effects of a depressed world economy and the increased risk aversion of investors pose growing risks for Sub-Saharan African financial systems. As a matter of fact, frontier and emerging market countries such as South Africa, Nigeria, Ghana, and Kenya were hit first, suffering falling equity markets, capital flow reversals, and pressures on exchange rates.
Research on initial public offerings (IPOs) generally suggests that company performance deteriorates after going public. For example, Aggrawal and Rivoli (1990) find that IPO long-run performance is worse than the market performance. They argue that the IPO long-run under performance may be result from fads or speculative bubbles in the early aftermarket stage. Ritter (1991) and Loughran and Ritter (1995) document that IPOs in the U.S. under perform significantly relative to non-issuing matching firms for three to five years after the listing date. Loughran, Ritter and Rydqvist (1994) even consider the IPO under performance is an international phenomenon. Many researchers have also documented a long-run decline in firms’ post-IPO operating performance. Jain and Kini (1994 and 1995), Mikkelson, Partch and Shah (1997) and Pagano, Panetta and Zingales (1998) have done so for the U.S. market. They indicate that long-run return performance is also accompanied by poor accounting performance post-IPO relative to pre-IPO performance and/or industry conditions. The received wisdom is that IPO firms tend to perform poorly after the offerings in the operating respect.
This study conjectures that earnings management behavior during lockup is crucial to the pattern of aftermarket operating under performance. The lockup ensures that the insiders wealth is connected to the fortunes of the IPO firm for a regulated period of time, and thus prompts insiders to overstate their profitability in lockup period by engaging earnings management (Teoh, Wong and Rao, 1998; Huang and Lin, 2007). In addition, Teoh et al. (1998) and Teoh, Welch and Wong (1998a) document significant positive discretionary accruals (DA) in the IPO year and the following year. Both the insiders incentive to preserve investors confidence in the newly established firm and the evidence of post-issue earnings management motivate the hypothesis that stock lockup plays an important role in explaining the pattern of post-issue deterioration in operating performance.
