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Abstract:
This paper analyzes the economics of the private equity industry using a novel model and dataset. We obtain data from a large investor in private equity funds, with detailed records on 238 funds raised between 1993 and 2006. We build a model to estimate the expected revenue to managers as a function of their investor contracts, and we test how this estimated revenue varies across the characteristics of our sample funds. Among our sample funds, about two-thirds of expected revenue comes from fixed-revenue components that are not sensitive to performance. We find sharp differences between venture capital (VC) and buyout (BO) funds. BO managers build on their prior experience by increasing the size of their funds faster than VC managers do. This leads to significantly higher revenue per partner and per professional in later BO funds. The results suggest that the BO business is more scalable than the VC business, and that past success has a differential impact on the terms of their future funds.

private equity, venture capital, fund managers

Abstract:
We examine the relation between analyst reputation and their recommendation values. We measure personal reputation using the Institutional Investor All-American (AA) awards. Daily-rebalanced portfolios of AA analysts’ recommendations yield significantly better risk-adjusted performance than those of non-AA analysts. AAs’ alphas are concentrated in the top-ranked (1st- and 2nd-place) AAs; the lower-ranked (3rd-place and runner-up) AAs do not perform better than non-AAs. Alphas for all analyst groups fall as investors’ access to recommendation information is delayed. But the assessed performance differential between the top-ranked AAs and other analysts is only marginally larger for investors who have private, pre-release access to recommendations than for public investors. The top-ranked AAs are also more experienced and have longer tenure as AAs than the lower-ranked AAs. Our results hold for both tech and non-tech sectors, are moderately strengthened by trading-cost adjustments, and are robust to alternative portfolio construction methods. We conclude that the top-ranked AAs are more skilled and produce more valuable information than other analysts. While the institution-granted AA status is a noisy indicator of analyst skill overall, the top two ranks of this award are useful signals from which public investors can benefit.

Analyst reputation, analyst status, star status, stock recommendations, analyst skill, private and public values of information

Abstract:
This paper studies the effect of bank relationships on underwriter choice in the U.S. corporate-bond underwriting market following the 1989 commercial-bank entry. I find that bank relationships have positive and significant effects on a firm's underwriter choice, over and above their effects on fees. This result is sharply stronger for junk-bond issuers and first-time issuers. I also find that there is a significant fee discount when there are relationships between firms and commercial banks. Finally, I find that serving as arranger of past loan transactions has the strongest effect on underwriter choice, whereas serving merely as participant has no effect.

Investment Banking, Universal Banking, Bank Relationships, Underwriting Market, Bank Competition

Abstract:
Using 1983-2002 U.S. data, we examine whether the quality differentials in earnings forecasts between reputable and non-reputable analysts vary as the severity of conflicts of interest varies. We measure personal reputation using the Institutional Investor All-American (AA) awards, and bank reputation using Carter-Manaster ranks. While both personal reputation and bank reputation are associated with higher-quality forecasts overall, their effectiveness against conflicts of interest differs. The severity of conflicts (proxied by the aggregate volume of new equity issues) has a negative and significant effect on the performance of non-AAs at top-tier banks relative to both AAs at top-tier banks and non-AAs at lower-tier banks. In contrast, the severity of conflicts has a positive and significant effect on the performance of AAs at top-tier banks relative to both non-AAs at top-tier banks and AAs at lower-tier banks. These findings suggest that personal reputation is an effective disciplinary device against conflicts of interest, while bank reputation alone is not.

Analyst research, Earnings forecast, Analyst reputation, Bank reputation, Conflict of interest, Investment banking

Abstract:
This paper examines the effects of bank relationships on underwriter choice in the Japanese corporate-bond market following the 1993 deregulation. Bank relationships have significant positive effects on a firm's underwriter choice. Relationship firms receive a small but significant fee discount and, consistent with mitigating effect of bank competition on holdup cost, multiple-relationship firms receive a significantly deeper discount than solo-relationship firms. Bank shareholding alone negatively affects underwriter choice, whereas shareholding together with loans have significantly more positive effects than loans alone. Finally, existing relationships reduce a Japanese firm's switching probability by 32%, in contrast to only 6% for U.S. firms.

Bank Relationships, Bank Shareholding, Investment Banking, Universal Banking, Bank Competition, Underwriting Market, Comparing Financial Systems

Abstract:
This paper examines the effects of bank relationships on underwriter choice in the Japanese corporate-bond market following the 1993 deregulation. Bank relationships have significant positive effects on a firm's underwriter choice. Relationship firms receive a small but significant fee discount and, consistent with mitigating effect of bank competition on holdup cost, multiple-relationship firms receive a significantly deeper discount than solo-relationship firms. Bank shareholding alone negatively affects underwriter choice, whereas shareholding together with loans have significantly more positive effects than loans alone. Finally, existing relationships reduce a Japanese firm's switching probability by 32%, in contrast to only 6% for U.S. firms.

Bank Relationships, Bank Equity Holdings, Investment Banking, Universal Banking, Bank Competition, Underwriting Market, Comparing Financial Systems

Abstract:
We examine the effects of the capital supply uncertainty (CSU) of the bond investor base on the leverage of the firm using novel data. We find that the CSU of the firm’s bond investor base has a negative and significant effect on the firm’s probability of issuing bonds, and a positive and significant effect on the firm’s probability of issuing equity and borrowing from banks. CSU has a negative and significant net effect on the leverage of the firm. The results are robust to controlling for the potential endogeneity of CSU. These incremental financing and the leverage results are driven by firms with highly concentrated investor bases. Finally, we find that CSU also affects the firm’s choice of debt maturity. Taken together, the findings suggest that the makeup of the firm’s bond investor base is very important in affecting the firm’s corporate financing policy and its capital structure.

institutional investors, supply uncertainty, corporate bonds, corporate finance, capital structure, clientele, capital base fragility

Abstract:
We examine the effects of institutional investors' credit supply uncertainty (CSU) in the corporate bond markets on the capital structure of the firm. We measure CSU as the bondholders' investment horizon, based on the idea that the shorter the investment horizon of investors, the higher the issuer's refinancing risk, i.e., the risk of not being able to roll over its maturing debt due to investors' credit supply uncertainty. We find that high CSU leads to lower leverage and lower probability of issuing bonds in the next period. High CSU, on the other hand, increases the firm's probability of issuing equity and borrowing from banks in the next period. Moreover, these effects are concentrated in firms whose bond investor base is more prone to credit supply imbalances, as measured by investor geographical concentration, herding propensity, and local bond preference. These findings suggest that the financial fragility arising from supply-based (as opposed to demand-based) factors have significant effects on the capital structure of the firm. While the positive effect of CSU on bank borrowing implies that issuers can substitute away from bonds into bank loans in times of high CSU, this substitution occurs only for firms whose bank relationships are nonexclusive. In contrast, CSU does not affect bank borrowing decisions of firms with exclusive bank relationships. Together, our findings suggest that investors' bond supply uncertainty and segmentation of the credit markets (bonds vs. bank loans) are important drivers of corporate financing policy and capital structure even for established firms with access to public bond markets.

supply-based financial fragility, credit market segmentation, corporate bonds, corporate finance, capital structure

Abstract:
We examine whether the quality differentials in earnings forecasts between reputable and nonreputable analysts vary with the severity of conflicts of interest. We measure personal reputation using the Institutional Investor All-American (AA) awards, and bank reputation using Carter-Manaster ranks. While both personal and bank reputation are associated with higher quality forecasts overall, their effectiveness against conflicts of interest differs. The severity of conflicts has a negative and significant effect on the performance of non-AAs at top-tier banks relative to other analysts, while it has a positive and significant effect on the performance of AAs at top-tier banks relative to others. Thus personal reputation is an effective disciplinary device against conflicts of interest, while bank reputation alone is not.

G14, G24, G28, D82, J44