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David Goldreich

Professor of Finance
Rotman School of Management

105 St. George Street
Toronto, Ontario M5S 3E6

Canada

Tel: +1-416-946-08 33

Fax: +1-416-971-3048

E-mail: david.goldreich@rotman.utoronto.ca

Download my CV

Teaching

BCOM: Financial Markets (RSM230)

MBA: Finance pre-course

Global Executive MBA: Finance I (RSM5301), Finance II (RSM5302)

Research

citations (n=1691)

Bounded Rationality of Dealers in U.S. Treasury Auctions

This paper provides evidence that bounded rationality and the behavioral phenomenon of framing plays a role in the decision making of the very largest institutions in very large and important markets - in the case the U.S. Treasury bill auctions. These dealers use a heuristic of yield-space bidding which, due to price-rounding rules, leads to biases manifested in two ways: they submit dominated bids, i.e. bids that could be improved without raising the price; and they disregard unevenness in the price grid. Consistent with bounded rationality, bidders are less susceptible to bias when the cost of suboptimal bidding is high. These results show that bounded rationality is a factor even for the most sophisticated institutions that are likely to be important for setting asset prices.

Interaction of equilibrium selection criteria: Round numbers as focal points in Treasury auctions (joint with Hanna Halaburda)

In games with multiple equilibria, a number of different equilibrium selection criteria have been proposed. This paper examines how the presence of a cultural focal point interacts with payoff-based selection criteria. The context we consider is a pay-as-bid common value auction with a discrete bidding grid. We show the conditions under which multiple equilibria arise. In the presence of multiple equilibria, the auction can be characterized as a coordination game (specifically a stag hunt game) which has both a Pareto-dominant equilibrium and a risk-dominant equilibrium. Empirically, we consider pay-as-bid Treasury bill auctions. We find that market-clearing bids (submitted as discount rates) more frequently end in a round number of 0 and less frequently end with a 9 than would otherwise be expected. In contrast, the frequency of bids ending with a final digit of 1 is not significantly different from a uniform distribution. We argue that this is evidence of multiple equilibria and a round-number focal point that interacts with Pareto dominance and risk dominance. It suggests that the decreased uncertainty caused by a culturally-based round-number focal point reduces the attractiveness of risk dominance as an equilibrium selection criterion.

When Smaller Menus are Better: Variability in Menu-Setting Ability (joint with Hanna Halaburda)

Management Science, 59(11), November 2013

Are large menus better than small menus? Recent literature argues that individuals' apparent preference for smaller menus can be explained by choosers' behavioral biases or informational limitations. These explanations imply that absent behavioral or informational effects, larger menus would be objectively better. However, in an important economic context - 401(k) pension plans - we find that larger menus are objectively worse than smaller menus, as measured by the maximum Sharpe ratio achievable. We propose a model in which menu setters differ in their ability to preselect the menu. We show that when the cost of increasing the menu size is sufficiently small, a lower-ability menu setter optimally offers more items in the menu than a higher-ability menu setter. Nevertheless, the menu optimally offered by a higher-ability menu setter remains superior. This results in a negative relation between menu size and menu quality: smaller menus are better than larger menus.

Initiating Bargaining (joint with Lukasz Pomorski)

Review of Economic Studies, 78(4), October 2011

(Best Paper Award, Financial Research Association conference (for earlier version))

We study whether the success of bargaining and the agreed upon terms depend on the characteristics of the person who initiates negotiations (“the initiator”). We approach this question in the context of high-stakes online poker tournaments, in which participants often negotiate a division of the prize money rather than risk playing until the end. Although initiators typically are in a worse than average position and are less well known, negotiations initiated by better known and better performing agents are more likely to lead to an agreement. This would suggest that gains to trade depend on who the initiator is, but, surprisingly, initiating bargaining does not affect the initiator's payoff in a completed deal.

Additionally, we find strong evidence in support of Cramton, Gibbons, and Klemperer (1987), who argue that bargaining is more likely to succeed when parties' stakes in an enterprise are close to equal.

Underpricing in Discriminatory and Uniform-Price Treasury Auctions

Journal of Financial and Quantitative Analysis, 42, June 2007

This paper examines how the Treasury auction mechanism affects pricing from both a theoretical and empirical perspective. Theoretically, I show that the discriminatory mechanism should result in more underpricing than the uniform-price mechanism, and the amount of underpricing should depend on auction characteristics. Empirically, I find underpricing of a magnitude consistent with the theory, both on average and in the cross section.

Investor Sentiment and Pre-IPO Markets (joint with F. Cornelli and A. Ljungqvist)

Journal of Finance, 61, June 2006

What role do sentiment investors play in the pricing of newly listed stocks? We derive conditions under which we can distinguish between sentiment and rational pricing behavior and test for the rationality of small investors' demand for new stock issues using data from pre-issue (or `grey') markets in Europe. Under sentiment, the model predicts asymmetric relations between the prices at which small investors trade new stock issues in the grey market and i) the subsequent issue price set by the investment bank, ii) prices in the early after-market, and iii) the degree of stock price reversal in the long run. Our empirical results suggest that sentiment demand is present and influences the pricing of newly listed firms.

The Price of Future Liquidity: Time-Varying Liquidity in the US Treasury Market (joint with B. Hanke and P. Nath)

Review of Finance, 9, March 2005 (lead article)

(Nominated for GSAM Prize for best paper in the Review of Finance)

In this paper we show that the value of securities depends on the expected liquidity of the security over its entire life. We take a new approach to valuing liquidity by following Treasury securities over liquidity cycles and we show how the liquidity premium declines as future liquidity falls. Moreover, we are able to distinguish between different aspects of liquidity (such as bid-ask spread and volume) and show how much each of these affects the liquidity premium.

Bookbuilding: How Informative is the Order Book? (joint with F. Cornelli)

Journal of Finance, 58, August 2003

(First Prize, ABN Amro International Conference on Initial Public Offerings)

(Finalist for Brattle Prize for best corporate finance paper in the Journal of Finance)

This paper examines how information in the order book is reflected in the IPO price under the bookbuilding mechanism. We find that the IPO price is closely related to the limit prices in the bids and to a lesser extent, to the level of oversubscription. The bids from certain classes of bidders are more informative than others. Oversubscription and elasticity in the book can be used to predict aftermarket performance.

Bookbuilding and Strategic Allocations (joint with F. Cornelli)

Journal of Finance, 56, December 2001

(Finalist for Brattle Prize for best corporate finance paper in the Journal of Finance)

This paper empirically examines the bids and allocation of shares in international equity issues. We infer the criteria used by the investment banker to allocate shares. We find that the bookrunner favors bidders who provide information and bidders who participate regularly. The results have implications for the theories related to the underpricing of initial public offerings.

Education

PhD (Financial Economics), Carnegie Mellon University, 1997

MS (Finance), Carnegie Mellon University, 1992

MSIA (MBA), with distinction, Carnegie Mellon University, 1990

BS (Engineering, Economics) with honors, California Institute of Technology, 1988

Media mentions

CHML radio, 8 August 2019 (stock market volatility)

CityNews television, 10 May 2019, (Uber IPO)

Economic Times (India), 10 May 2013 (Menus)

National Post, 7 May 2013 (Markets for kidneys)

Financial Post, 27 Nov 2012, 30-Second Mentor (IPO reward)

Financial Post, 20 Nov 2012, 30-Second Mentor (IPO risk)