This paper examines the debt underwriting relationship of publicly-traded U.S. banks (investment and commercial banks). In nearly 30% of their debt issuances, banks hire an external underwriter. This selection is related to our newly developed bank-specific motivations, including underwriting capacity, distribution networks, ranking and the bank’s current competitive position, in addition to traditional needs such as expertise and information sharing. We find that the decision to use another underwriter has implications for bank issuers at the deal level as well as at the firm level, and ultimately can affect a bank’s reputation, networking, and profitability.

Takeover targets covered by more equity analysts receive higher premiums while their acquirers earn lower merger announcement returns. We confirm these results using exogenous shocks to coverage as instruments for coverage loss. The analyses also show that covered targets experience a permanent market value appreciation in deals that are subsequently withdrawn. These findings indicate that analyst coverage of takeover targets materially affects shareholder wealth for both targets and acquirers. Our evidence indicates that analyst coverage creates value for shareholders of takeover targets through either a monitoring channel or a visibility improvement channel, but not through a reduction in information asymmetry.

This paper examines the previously undocumented debt underwriting relationship for banks. Publicly-traded investment and commercial banks (“banks”) are unique in that they are the only firms capable of underwriting their own securities. Banks, however, hire a rival in nearly 30% of their debt issuances and do so extensively across bank size, quality, and type. The decision to use a rival is related to expertise, information sharing, as well as our newly-proposed bank-specific (distribution networks, capacity, and ranking) motivations and is costly to issuers. These results provide new evidence of banks’ underwriter choice and the pervasive use of rivals.

We examine long-term firm-advisor relations using an extended history of debt, equity, and merger transactions. Hard-to-value firms are more likely to maintain dedicated advisor relations (underwriters or merger advisors). Firms that retain predominantly one advisor over their entire transaction history pay higher underwriting/advisory fees, have inferior deal terms, and have lower analyst coverage relative to those that employ many advisors. When we condition on a firm’s information environment as a catalyst for long-term advisor retention, riskier firms obtain better terms when they utilize a variety of advisors, but informationally-opaque firms do not. Our results suggest that only some firms benefit from long-term advisor retention.

This paper investigates the effects of analyst recommendations issued after a merger announcement on deal completion. We find the probability of completion increases decreases with the favorability of acquirer target recommendations. Results from instrumental variables tests support causality running from recommendations to merger outcomes. Additional tests suggest that these relations are driven by target shareholders reassessing the merger offer in response to movements in acquirer and target valuations. We also find that favorably recommended firms in a proposed merger underperform following deal resolution, suggesting that investors overreact to postmerger announcement recommendations.This paper was accepted by Wei Jiang, finance.

This paper develops and applies a new approach for disentangling the influence of analysts on each other's earnings forecasts from the effects of correlated information shocks. We estimate that, on average, each cent a new forecast by an analyst is above (below) another analyst's most recent forecast causes the other analyst to revise her forecast upwards (downwards) by between 0.21 and 0.36 cents. More reputable analysts are more influential, while those that tend to be optimistic are less influential and are influenced more by the forecasts of other analysts. We do not find support for career concerns-driven herding or anti-herding. Finally, we find that more influential analysts are more likely to subsequently be ranked as All-Stars and to move from a less to a more prestigious brokerage house, and less likely to leave the analyst profession, suggesting that influence is a desirable characteristic.

Using an extended history of debt, equity, and merger transactions, we examine the firm-advisor relationship and generally find that it is costly to maintain long-term relations with financial advisors (underwriters or merger advisors). Firms that retain one advisor over their entire transaction history pay higher underwriting/advisory fees, have inferior deal terms, and lower analyst coverage relative to those that employ many advisors. Using financial deterioration and the firm’s information environment as catalysts for why firms may select a single advisor, we observe that even poorly performing firms obtain better terms when they utilize a variety of advisors, but informationally-sensitive firms do not. Our results suggest that only some firms benefit from advisor retention, but for most it does not pay to stay.

Download This Paper Open PDF in Browser Add Paper to My Library Share: Permalink Using these links will ensure access to this page indefinitely Copy URL Copy DOI

This paper examines the mechanisms by which acquirer CEOs are incentivized and their impact on merger decisions. We argue that the pre-merger structure of CEO wealth impacts a CEO’s risk tolerance and ultimately her willingness to undertake a merger as well as the framework of the deal. As the riskiness of CEO wealth increases (as measured by excess vega or cumulative option-based wealth), firms are more likely to become an acquirer, pay higher premiums, and experience lower post-merger performance. These results hold controlling for CEO overconfidence and cannot be attributed to firms altering incentives to induce CEOs to partake in mergers. Post financial crisis, we find both a shift in the composition of CEO pay and its relation to mergers. Overall, these results have important policy implications in the debate over optimal CEO pay as the structure by which CEOs are compensated appears to impact firm choices.

This paper develops a new approach to distinguishing clustering in analyst forecasts due to the causal influence of one analyst’s forecast on another from clustering due to a common response to correlated information. We apply this approach by studying how analysts who currently provide forecasts for a firm (“incumbent" analysts) revise their forecasts in response to the first forecasts of analysts initiating coverage of the firm (“new” analysts). We find that, on average, incumbent analysts close the gap between new analysts’ forecasts and their own forecasts, consistent with clustering in forecasts. However, we conclude that this effect is not driven at all by the causal influence of new analysts’ forecasts, but rather by a common response to correlated information. Cross-sectional tests indicate that the effects of correlated information are stronger when the analysts involved are likely to be better-informed.

This paper examines the mechanism by which CEOs are incentivized and its impact on merger decisions. We argue that CEO ownership and incentive-based (option) holdings are not interchangeable and have differing effects on the choice to undertake a merger, the structure of mergers conditional on a firm undertaking a merger, and ultimately the performance of a deal. Results suggest that CEO ownership is incentive aligning; enabling CEOs to make decisions around mergers that maximize shareholder value. CEOs with higher levels of ownership are less likely to take on mergers, less likely to hire advisors, more likely to use cash financing, and have better post-merger performance. CEO incentive-based holdings on the other hand are associated with higher incidence of hiring an advisor and lower probability of using cash financing, but do not appear related to other merger decisions. These results suggest that CEOs with high option holdings may be motivated more by agency conflicts than acting in shareholder interests. ● David A. Becher: Drexel University, Department of Finance, 101 N. 33 Street, Room 218 and Fellow, Wharton Financial Institutions Center, University of Pennsylvania, Philadelphia, PA 19104, phone: (215) 895-2274, email: becher@drexel.edu. Jennifer L. Juergens: Drexel University, Department of Finance, 101 N. 33 rd Street, Room 214B, Philadelphia, PA 19104, phone: (215) 895-2308, email: jlj54@drexel.edu. Jack R. Vogel: Drexel University, Department of Finance, 101 N. 33 rd Street, Philadelphia, PA 19104, email: jrv34@drexel.edu We appreciate comments from Jie Cai, Jacqueline Garner, Stephen Stumpf, Ralph Walkling, and seminar participants at Drexel University. We thank Rachel Gordon for excellent research assistance.

We explore how analyst recommendation changes affect a security's trading volume at the market maker of the analyst's own firm. Using Nasdaq PostData, we find a dramatic increase in trading volume handled by the market maker of the analyst's firm relative to other market makers on recommendation release days. On days when upgrades are released, buying volume increases appreciably at the recommending market maker's firm. For downgrades, however, we find no disproportional sell volume on the day of the recommendation release. Instead, we find evidence of increased selling at the downgrading analyst's firm in the two days prior to the official release of a downgrade. This pattern of activity constitutes new evidence on compensation for research production through the market-making channel. The latter evidence is consistent with clients being rebated part of these research expenses through limited pre-release, in effect, a new form of "soft dollar" benefit. Particularly in light of recent regulatory changes, these findings also raise questions about the selective release of negative news.

We study asset pricing in economies featuring both risk and uncertainty. In our empirical analysis, we measure risk via return volatility and uncertainty via the degree of disagreement of professional forecasters, attributing different weights to each forecaster. We empirically model the typical risk-return trade-off and augment these models with our measure of uncertainty. We find stronger empirical evidence for an uncertainty-return trade-off than for the traditional risk-return trade-off. Finally, we investigate the performance of a two-factor model with risk and uncertainty in the cross section.

Heterogeneity is important for the modeling of economic agents. Economic agents differ in their beliefs, access to information, preferences, and endowments. Despite these differences and despite strong and persuasive arguments put forward for including heterogeneity in finance and macroeconomics, the representative agent paradigm is still the leading structural approach in empirical finance and macroeconomics. One major barrier for incorporating heterogeneity is the lack of tangible data on the beliefs of individual agents. In our research program, we partially overcome this barrier by using the stated predictions of financial and macroeconomic forecasters as proxies for the beliefs of agents. See for example Anderson, Ghysels and Juergens (2005) where we use the disagreement of financial forecasters to proxy for the amount of belief heterogeneity. Uncertainty is crucial for the understanding of financial and macroeconomic issues. Most empirical research in finance and macroeconomics incorporates risk in a central way but fails to distinguish risk from uncertainty. Following Knight (1921), Keynes (1937), and recent papers on robustness and ambiguity, we distinguish uncertainty from risk by calling an event risky if its outcome is unknown but the distribution of its outcomes is known, and an event uncertain if its outcome is unknown and the distribution of its outcomes is also unknown. The few papers that have studied uncertainty and its impact on asset pricing have been mostly theoretical. One major barrier for incorporating uncertainty is the lack of tangible data on uncertainty. In our research program, we suggest empirically tractable methods of measuring uncertainty. See for example Anderson, Ghysels and Juergens (2009) where we use the disagreement of macroeconomic forecasters as a proxy for uncertainty. We propose to study a new structural model of forecasters which simultaneously incorporates heterogeneity and uncertainty. A significant limitation of the existing literature is the lack of a structural model describing the behavior of forecasters that is integrated with a fully specified model of asset prices and the macroeconomy. Previous studies typically have adopted a reduced form approach for modeling the behavior of forecasters. However, forecasters are optimizing agents and we propose a method for modeling their behavior that leads to improved measures of heterogeneity and uncertainty. Unlike previous studies (including our own earlier work) we propose to simultaneously disentangle risk, uncertainty, disagreement and heterogeneous beliefs. We intend to study asset pricing and the determination of macroeconomic variables in economies featuring uncertainty and heterogeneous agents. We will examine the effects of risk, uncertainty, disagreement, and heterogeneous beliefs on the market excess return, the cross-section of returns, the determination of output and inflation, and the link between consumption and asset prices. Our results should benefit practitioners and policy makers by increasing their understanding of the dynamics of uncertainty and beliefs. It should allow practitioners to give clients better advice on asset allocations that avoid catastrophic losses. It should allow government policy makers to respond quicker to a changing economy to mitigate the severity of recessions.

This paper examines the mechanism by which CEOs are incentivized and its impact on merger decisions. We argue that CEO ownership and incentive-based (option) holdings are not interchangeable and have differing effects on the choice to undertake a merger, the structure of mergers conditional on a firm undertaking a merger, and ultimately the performance of a deal. Results suggest that CEO ownership is incentive aligning; enabling CEOs to make decisions around mergers that maximize shareholder value. CEOs with higher levels of ownership are less likely to take on mergers, less likely to hire advisors, more likely to use cash financing, and have better post-merger performance. CEO incentive-based holdings on the other hand are associated with higher incidence of hiring an advisor and lower probability of using cash financing, but do not appear related to other merger decisions. These results suggest that CEOs with high option holdings may be motivated more by agency conflicts than acting in shareholder interests. ● David A. Becher: Drexel University, Department of Finance, 101 N. 33 Street, Room 218 and Fellow, Wharton Financial Institutions Center, University of Pennsylvania, Philadelphia, PA 19104, phone: (215) 895-2274, email: becher@drexel.edu. Jennifer L. Juergens: Drexel University, Department of Finance, 101 N. 33 rd Street, Room 214B, Philadelphia, PA 19104, phone: (215) 895-2308, email: jlj54@drexel.edu. Jack R. Vogel: Drexel University, Department of Finance, 101 N. 33 rd Street, Philadelphia, PA 19104, email: jrv34@drexel.edu We appreciate comments from Jie Cai, Jacqueline Garner, Stephen Stumpf, Ralph Walkling, and seminar participants at Drexel University. We thank Rachel Gordon for excellent research assistance.

This paper investigates the relation between investment analyst recommendations and merger completion. Unlike the new issues market, we argue analysts’ incentives are skewed to issue recommendations that ensure merger completion rather than maximize the overall deal value. Using a comprehensive sample of completed and withdrawn mergers, we observe the direction and affiliation of recommendations significantly impact the probability of merger completion. These effects are magnified for stock mergers where analysts can directly affect the acquisition currency. In the case of withdrawn deals, recommendations are related to which party is likely to terminate a merger. Overall, our results suggest analyst recommendations are linked to merger outcomes, though those recommendations appear biased to secure deal completion.

Existing evidence on the value of independent analysts' opinions is inconclusive. Despite the various potential conflicts of interest analysts face, stock prices tend to move in the same direction as analyst recommendations. We shed new light on the informational role of analysts through use of an independent source of evidence - individual insider trades. Because insiders represent an acknowledged class of smart money, their activities would be uncorrelated with any valueless expert sources in the same stock, both in timing and in direction, and positively correlated with other smart money. We find instead that insiders tend to trade after releases of opinions, and in strong contrarian fashion with respect to the direction of analysts' recommendations. When insiders do trade before recommendations, they reliably anticipate the direction of the recommendation subsequently made. Pre-upgrade insider purchases achieve significant post-trade abnormal returns and insiders reliably circumvent abnormal losses by selling before or after an analyst downgrade. CEO and CFO trades are significantly more profitable than those of other insiders. Granger causality tests indicate the flow of information is one-sided in the direction of insider trades to analyst recommendation changes.

We rely on recently developed general equilibrium asset pricing models, from which we derive some predictions about how heterogeneity of beliefs affects return and volatility dynamics. The first contribution of our paper is the derivation of a simple decomposition of the conditional stock returns and volatility into two components, one component determined by traditional fundamental factors, the other component dependent on the heterogeneity of beliefs. The second contribution of our paper is that we suggest a new empirical measure of heterogeneity of beliefs of agents. We address the practical question of whether we can observe good proxies that capture informational heterogeneity and obey the predictions of theoretical models. It is argued factors that capture the dispersion of analysts' earnings forecasts are such proxies. We use factor asset pricing models to construct conventional predictions of returns and volatility. First, we determine dispersion is a priced risk factor in traditional asset pricing models. Second, we show dispersion is significantly and positively related to both out-of-sample returns and volatility, which is coherent with the theoretical decomposition.

In this study, we attempt to add some clarification to the ongoing debate of REITs. While REITs have some characteristics similar to those of common stocks, they behave fundamentally different from stocks in general. Using a matched sample comparison, we find that REITs have lower return variability and lower correlation to the market, but higher institutional participation than other firms. In tests of forecast unbiasedness, we observe significant levels of bias and inefficiency for both REITs and common stocks when we use traditional rational expectations models. Lastly, we examine the market reaction to earnings forecast revisions. All forecast revisions, for both REITs and stocks, have significant price reactions around the revision. These returns are magnified when the sample is divided into sub-categories based on the sign of the revision or whether the analyst simultaneously changed his investment recommendation. Furthermore, while forecast errors do have some explanatory power for returns around the revision date, the level is greater for stocks than for REITs.