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173
Why Has IPO Underpricing Changed Over Time?
, 2003
"... In the 1980s, the average first-day return on initial public offerings (IPOs) was 7%. The average first-day return doubled to almost 15% during 1990-1998, before What explains the severe underpricing of initial public offerings in 1999-2000, when the average first-day return of 65% exceeded any l ..."
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Cited by 155 (9 self)
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In the 1980s, the average first-day return on initial public offerings (IPOs) was 7%. The average first-day return doubled to almost 15% during 1990-1998, before What explains the severe underpricing of initial public offerings in 1999-2000, when the average first-day return of 65% exceeded any level previously seen before? In this article, we address this and the related question of why IPO underpricing doubled from 7% during 1980-1989 to almost 15% during 1990-1998 before reverting to 12% during the post-bubble period of 2001-2003. Our goal is to explain low-frequency movements in underpricing (or first-day returns) that occur less often than hot and cold issue markets. We examine three hypotheses for the change in underpricing: 1) the changing risk composition hypothesis, 2) the realignment of incentives hypothesis, and 3) a new hypothesis, the changing issuer objective function hypothesis. The changing issuer objective function hypothesis has two components, the spinning hypothesis and the analyst lust hypothesis. The changing risk composition hypothesis, introduced by The realignment of incentives and the changing issuer objective function hypotheses both We thank Hsuan
Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations, Working Paper
, 2003
"... We investigate directly whether analyst behavior influenced the likelihood of banks winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings sold between December 1993 and June 2002. We control for the strength of the issuer’s investment-banking relationships with potentia ..."
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Cited by 75 (5 self)
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We investigate directly whether analyst behavior influenced the likelihood of banks winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings sold between December 1993 and June 2002. We control for the strength of the issuer’s investment-banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank’s decision to provide analyst coverage. We find no evidence that aggressive analyst recommendations or recommendation upgrades increased their bank’s probability of winning an underwriting mandate after controlling for analysts ’ career concerns and bank reputation. Our findings might be interpreted as suggesting that bank and analyst credibility are central to resolving information frictions associated with securities offerings.
Economic forecasting
, 2007
"... Forecasts guide decisions in all areas of economics and finance and their value can only be understood in relation to, and in the context of, such decisions. We discuss the central role of the loss function in helping determine the forecaster’s objectives. Decision theory provides a framework for bo ..."
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Cited by 65 (3 self)
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Forecasts guide decisions in all areas of economics and finance and their value can only be understood in relation to, and in the context of, such decisions. We discuss the central role of the loss function in helping determine the forecaster’s objectives. Decision theory provides a framework for both the construction and evaluation of forecasts. This framework allows an understanding of the challenges that arise from the explosion in the sheer volume of predictor variables under consideration and the forecaster’s ability to entertain an endless array of forecasting models and time-varying specifications, none of which may coincide with the ‘true’ model. We show this along with reviewing methods for comparing the forecasting performance of pairs of models or evaluating the ability of the best of many models to beat a benchmark specification.
Relational contracts and the nature of market interactions
- Econometrica
, 2004
"... We provide evidence that long-term relationships between trading parties emerge endogenously in the absence of third party enforcement of contracts and are associated with a fundamental change in the nature of market interactions. Without third party enforcement, the vast majority of trades are init ..."
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Cited by 62 (11 self)
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We provide evidence that long-term relationships between trading parties emerge endogenously in the absence of third party enforcement of contracts and are associated with a fundamental change in the nature of market interactions. Without third party enforcement, the vast majority of trades are initiated with private offers and the parties share the gains from trade equally. Low effort or bad quality is penalized by the termination of the relationship, wielding a powerful effect on contract enforcement. Successful long-term relations exhibit generous rent sharing and high effort (quality) from the very beginning of the relationship. In the absence of third-party enforcement, markets resemble a collection of bilateral trading islands rather than a competitive market. If contracts are third party enforceable, rent sharing and long-term relations are absent and the vast majority of trades are initiated with public offers. Most trades take place in one-shot transactions and the contracting parties are indifferent with regard to the identity of their trading partner.
How Did Increased Competition Affect Credit Ratings,”
- Journal of Financial Economics,
, 2011
"... a b s t r a c t The credit rating industry has historically been dominated by just two agencies, Moody's and Standard & Poor's, leading to long-standing legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive l ..."
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Cited by 59 (4 self)
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a b s t r a c t The credit rating industry has historically been dominated by just two agencies, Moody's and Standard & Poor's, leading to long-standing legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how increased competition affects the credit ratings market. What we find is relatively troubling. Specifically, we discover that increased competition from Fitch coincides with lower quality ratings from the incumbents: Rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories.
Are small investors naive about incentives?
, 2007
"... Security analysts tend to bias stock recommendations upward, particularly if they are affiliated with the underwriter. We analyze how investors account for such distortions. Using the NYSE Trades and Quotations database, we find that large traders adjust their trading response downward: they exert b ..."
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Cited by 52 (2 self)
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Security analysts tend to bias stock recommendations upward, particularly if they are affiliated with the underwriter. We analyze how investors account for such distortions. Using the NYSE Trades and Quotations database, we find that large traders adjust their trading response downward: they exert buy pressure following strong buy recommendations, no reaction to buy recommendations, and selling pressure following hold recommendations. This “discounting” is even more pronounced when the analyst has an underwriter affiliation. Small traders, instead, follow recommendations literally. They exert positive pressure following both buy and strong buy recommendations and zero pressure following hold recommendations. We discuss possible explanations for the differences in trading response, including informa-tion costs and investor naiveté.
Who Blows the Whistle on Corporate Fraud?
"... To identify the most effective mechanisms for detecting corporate fraud we study all reported fraud cases in large U.S. companies between 1996 and 2004. We find that fraud detection does not rely on standard corporate governance actors (investors, SEC, and auditors), but takes a village, including s ..."
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Cited by 38 (6 self)
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To identify the most effective mechanisms for detecting corporate fraud we study all reported fraud cases in large U.S. companies between 1996 and 2004. We find that fraud detection does not rely on standard corporate governance actors (investors, SEC, and auditors), but takes a village, including several non-traditional players (employees, media, and industry regulators). Differences in access to information, as well as monetary and reputational incentives help to explain this pattern. In-depth analyses suggest reputational incentives in general are weak, except for journalists in large cases. By contrast, monetary incentives help explain employee whistleblowing.
Who is Afraid of Reg FD? The behavior and performance of sell-side analysts following the SEC's Fair Disclosure Rules
- Journal of Business
, 2006
"... Analysts Following the SEC’s Fair Disclosure Rules Effective October 23, 2000, the Securities and Exchange Commission adopted a set of fair disclosure rules (‘Reg FD’) that prohibit companies from disclosing earnings or other material business information to some analysts or large investors before a ..."
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Cited by 34 (0 self)
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Analysts Following the SEC’s Fair Disclosure Rules Effective October 23, 2000, the Securities and Exchange Commission adopted a set of fair disclosure rules (‘Reg FD’) that prohibit companies from disclosing earnings or other material business information to some analysts or large investors before announcing it publicly. This paper empirically analyzes the implications of these new rules on several aspects of the behavior and performance of sell-side equity analysts. We analyze forecasts made for a large sample of public companies for three post-FD quarters and for several pre-FD years. We estimate panel regressions using the fixed effects model, and examine both early and late forecasts. We have three main findings. First, earnings forecasts become less accurate post-FD at the levels of both the individual analyst and the consensus. Our evidence suggests that this effect is not entirely due to the recession. Second, individual analysts following a company become more dispersed in their earnings forecasts post-FD. The magnitudes of these two effects are generally bigger in
Analyst conflicts and research quality. Working paper
, 2004
"... Maastricht for helpful comments and suggestions. We also thank Thomson Financial for providing analyst forecast data via the Institutional Brokers Estimates System (I/B/E/S). Agrawal acknowledges financial support from the William A. Powell, Jr. Chair in Finance and Banking. Analyst Conflicts and Re ..."
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Cited by 27 (0 self)
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Maastricht for helpful comments and suggestions. We also thank Thomson Financial for providing analyst forecast data via the Institutional Brokers Estimates System (I/B/E/S). Agrawal acknowledges financial support from the William A. Powell, Jr. Chair in Finance and Banking. Analyst Conflicts and Research Quality This paper examines how the quality of stock analysts ’ forecasts is related to conflicts of interest from investment banking and brokerage. We consider four aspects of forecast quality: accuracy, bias and frequency of revision of quarterly earnings forecasts, and relative optimism in long-term earnings growth (LTG) forecasts. Using a unique dataset that contains the revenue breakdown of analysts ’ employers among investment banking, brokerage, and other businesses over the 1994-2003 period, we establish two main findings. First, there appears to be no relation between accuracy or bias in quarterly forecasts and several measures of conflict severity, after controlling for forecast age, firm resources and analyst workloads. This result holds even for technology stocks and during the late 1990s stock market boom. Second, relative optimism in LTG forecasts and the
Pay for Performance from Future Fund Flows: The Case of Private Equity
, 2012
"... Lifetime incomes of private equity general partners (GPs) are affected by their current funds ’ performance not only directly, through carried interest profit-sharing provisions, but also indirectly by the effect of the current fund’s performance on GPs ’ abilities to raise capital for future funds. ..."
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Cited by 22 (7 self)
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Lifetime incomes of private equity general partners (GPs) are affected by their current funds ’ performance not only directly, through carried interest profit-sharing provisions, but also indirectly by the effect of the current fund’s performance on GPs ’ abilities to raise capital for future funds. In the context of a rational learning model, which we show better matches the empirical relations between future fund-raising and current performance than behavioral alternatives, we estimate that indirect pay for performance from future fund-raising is of the same order of magnitude as direct pay for performance from carried interest. Consistent with the learning framework, indirect pay for performance is stronger when managerial abilities are more scalable and weaker when current performance is less informative about ability. Specifically, it is stronger for buyout funds than for venture capital funds, and declines in the sequence of a partnership’s funds. Total pay for performance in private equity is both considerably larger and much more heterogeneous than implied by the carried interest alone. Our framework can be adapted to estimate indirect pay for performance in other asset management settings.
