• Selected
• Entire List

Abstract:
Employing a new method of industry tests we examine investment bank governance. Most of the findings reject the view that banks are governed suboptimally over a sample period from 1990 through 2003. CEO pay is large and significantly sensitive to stock price performance, and stock price performance often outperforms the market. Results are consistent with bank directors being reputable, independent, and in control of their committees. Bank management is disciplined by pressure from a number of competitive product markets and from a vigorous market for bank control. No evidence exists that unusual governance qualities that could be unique to investment banking are indications of poor governance performance. The evidence agrees with the view that investment banks choose optimal governance.

Boards of directors, board size, board composition, bond offerings, CEOs, commercial banks, comparative corporate governance, corporate control, corporate governance, directorships, endogeneity, executive compensation, Glass-Steagall, initial public offerings, investment bankers, investment banking

Abstract:
We examine analysts' earnings forecast behavior around SEOs. We document that equity issuers are among the high growth IBES firms that typically have much higher forecast errors. Adjusting for this bias we find that earnings per share forecasts around equity offerings are not more favorable than forecasts for other high growth firms. Further, analysts forecasts of issuers' long run growth prospects around the SEOs are not more favorable than those of other high growth firms. This suggests that abnormal forecasts observed around equity issuance, for either short run or long run forecasts, is not unique but is instead a phenomenon that is common to high growth firms. They are not consistent with the hypothesis that equity offerings coincide with a period of overly favorable earnings expectations. We also find that firm management increases in discretionary reported earnings around SEOs, which are viewed as a proxy for earnings manipulation, do not have a significant effect on earnings forecasts. These results are consistent with analysts and their investment banks behaving credibly around SEOs. The results do not agree with the notions that management has foresight of investors' irrationally optimistic earnings expectations when their firm issues equity, and that they can influence those expectations through inflating non-cash components of reported earnings.

Abstract:
We present a model in which underwriters ¿buy¿ early holding of IPO shares with underpricing and test the model's empirical implications. Issuers hire underwriters to price IPOs and allocate the shares to obtain benefits from holding. Buying institutions receive payment in two installments: revenues from flipping part of their initial allocations and gains from the future sale of remaining shares. The model suggests that IPOs with more reputable institutional buyers have larger holdings, greater price revisions, and more underpricing, as do IPOs underwritten by reputable underwriters. Our model also explains many of the major stylized facts about underpricing, and thus empirically dominates a number of theories found in the literature. We report several results that agree with the holding explanation.

Initial public offerings, Going public, Investment banking, Underpricing, Institutional investors, Underwriters

Abstract:
Abnormal returns in the week before equity offerings are unusually negative and widespread, afflicting 65% of issuers during 1985-2000. They also are large, as the mean is -2.6%. Stock prices increase in the offer week, but the increases are small and they are not a reversal of the pre-offer price declines. The resulting longer-term losses are comparable to the widely known losses inflicted on stockholders when the offerings are first announced. An offer-size effect that agrees with modest longer-term price pressure can explain only a small part of longer-term negative returns. Further findings agree with the notion that the fall in stock prices is a reaction to negative information that may be produced by the underwriting process. While the price drop is not a market inefficiency in the presence of transaction costs, the fact that it is not incorporated sooner in the market price remains a puzzle.

Underwriters, Seasoned public offerings, Investment banking, Underpricing

Abstract:
This study examines whether security analyst earnings forecasts are informative. A widely held view supported by several empirical studies is that security analyst earnings forecasts are informative. We present evidence drawn from more detailed analyses of security returns than used in past studies which shows analyst forecasts are not particularly informative. This finding agrees with the recent finding of Altinkilic and Hansen (2009), that analyst recommendations are not informative. We also show that analysts forecast tend to piggyback on the news and recent events. We examine whether our conclusions also apply in the case of bold forecasts, more accurate forecasts, more timely forecasts, and forecasts from analysts at more reputable brokerages. However, in all cases we find forecast revisions to be information-free. We conclude from the combined findings that security analysts are not information agents in securities markets, contrary to the conventional view.

Analysts, Analysts' forecasts, Analysts' under/overreaction to information, Brokerage research, Capital markets, Contrarian strategies, Efficient markets, Financial markets, Information production, Market efficiency, Momentum effects, Post-earnings announcement drift, Sell-side analysts

Abstract:
We examine the information transmission role of stock recommendation revisions by sell-side security analysts. Revisions are associated with economically insignificant mean price reactions and often piggyback on recent news, events, long-term momentum, and short-run contrarian return predictors, typically downgrading after bad news and upgrading after good news. However, the revisions are usually information-free for investors. The findings go against the long-standing view that recommendations are an important means by which analysts assimilate information into stock prices. They disagree with the view of policymakers that analysts’ stock picks materially impact stock prices.

analysts’ recommendations, brokerage research, capital markets, investment banking, market efficiency, security analysts

Abstract:
Discounting and underpricing spread across most seasoned equity offers in the 1990s and were four to five times higher than in earlier years - particularly for riskier and more difficult to market offers, which were more prevalent. Analyses suggest that expected discounting is a cost of uncertainty about firm value, marketing new shares, and acquiring information that raises the offer price. Stockholders appear to recognize this as they incorporate predictable discounting in stock prices when equity offers are first announced. The surprise component of discounting, which reflects the lead bank's final adjustment to the offer price after the close of trading the night before the offer, releases information that often causes economically large swings in firm value on the offer day. The evidence points to disparities between the issuer's closing price and the price suggested in the lead bank's final order book as a primary source of information. The discount surprise appears to be an effective mechanism used by lead banks to update capital suppliers with that eleventh hour information before they commit their funds.

Underwriters, Seasoned public offerings, Investment banking, Underpricing

Abstract:
In the 1990s, over 85% of all initial public offerings (IPOs) in the US paid a 7% spread. Two hypotheses that may explain this convergence to 7% are one, that investment bankers colluded to profit from 7% IPOs or two, that the "7% contract" is an efficient innovative response the standard firm commitment contract is tailored to better conform to the IPO. This paper reports results of testing these two hypotheses. The collusion theory is not supported: there is low concentration and has been much entry in the IPO market. Further, a 7% spread is found to be less profitable than normal. Nor has it been used less frequently after it was made know that collusion allegations had been raised against the banks. Further evidence is consistent with efficient contract hypothesis. I find evidence consistent with competition among the banks in terms of reputation, placement abilities, and in the underpricing the IPOs.

Abstract:
In the 1990s, over 85% of all initial public offerings (IPOs) in the US paid a 7% spread. Two hypotheses that may explain this convergence to 7% are one, that investment bankers colluded to profit from 7% IPOs or two, that the "7% contract" is an efficient innovative response the standard firm commitment contract is tailored to better conform to the IPO. This paper reports results of testing these two hypotheses. The collusion theory is not supported: there is low concentration and has been much entry in the IPO market. Further, a 7% spread is found to be less profitable than normal. Nor has it been used less frequently after it was made know that collusion allegations had been raised against the banks. Further evidence is consistent with efficient contract hypothesis. I find evidence consistent with competition among the banks in terms of reputation, placement abilities, and in the underpricing the IPOs.

Abstract:
We investigate the choice between hiring syndicates through competitive bidding and negotiation. Making syndicates compete can result in inferior terms because of inefficiencies like less effective search, possibly less total search, and trapped bidders. Empirical results are consistent with our hypothesis that purchasing syndicates search less under competition and that competition produces trapped bidders. The results also show that the primary market is rigidly divided under competition. When this occurs, total search under competitive bidding can be less than total search under negotiation. This may explain why competitive bidding is not favored in spite of its lower cost.

Abstract:
This study examines the behavior of spreads paid in firm underwritten seasoned common stock offerings and straight bond offerings. Estimates indicate that up to 85% of the spread is variable cost and that the marginal spread is rising. Further, offerings that are likely to require greater underwriting services encounter higher marginal spreads. These findings are consistent with there being a family of U-shaped spreads, with lower quality offerings priced on higher spreads, unlike the economies of scale view of spreads. They agree with the views that underwriters provide valuable services and that the marginal cost of external finance is rising.

Abstract:
For the period 1971-1991, we find that firms issue bonds when a significant long-term upturn in performance levels off. The performance is significantly above normal for the five-year pre-issuance period but quickly falls to normal in the issuance year and remains so for the next five years. This is quite a different picture of performance than prior studies suggest. Besides a shorter observation period in the previous studies, we suggest that this difference is due to rebalancing bias in prior studies. Cross-sectional tests show a positive relationship between bond risk and pre-period abnormal performance, consistent with the adverse-selection model of financing decisions. However, our results also suggest that issuers realize significant pre-period abnormal performance, after accounting for bond risk.