Conflicts of interest in initial public offerings

In my thesis I investigate the conflicts of interests between underwriters, issuers, and investors in initial public offerings (IPOs). I provide empirical evidence that conflicts of interest exist, affect the IPO process, and have real monetary costs for IPO issuers. The novel data, methodologies, and identification strategies used in this thesis allow answering questions so far unexplored by the existing literature. In Chapter I of my thesis, co-authored with François Degeorge, I investigate the conflicts of interest that may arise when the investment bank that underwrites the IPO also has an investment management arm. Using a novel hand-collected dataset of U.S. IPO allocations, I implement a Regression Discontinuity Design and find that underwriters underprice IPOs to benefit their affiliated funds at the expenses of IPO issuers. In Chapter II, co- authored with Tamara Nefedova, I analyze institutional investors' trading behavior in the IPO after-market. Using detailed trading data, I find that institutional investors are less likely to sell than buy through the lead underwriters, consistent with institutions hiding their sell trades from IPO underwriters

Three essays on financial intermediation

Financial intermediation plays a central role in connecting capital demanders, i. e. firms, and capital suppliers, i. e. investors. My essays focus on two types of financial intermediaries, namely investment banks, who provide a variety of services for firms and institutional investors, and sell-side security analysts, who analyze and provide information about firms, mainly, to institutional investors. The first essay studies security analysts’ cognitive biases in issuing earnings forecasts; the second essay studies analysts’ capital expenditure forecasts; and, the third essay studies the underwriting relationship value between investment banks and their client firms

Corporate governance issues and performance of initial public offerings

In my PhD thesis I analyze corporate governance issues of initial public offerings and their subsequent performance. In the first chapter I find that the first-day return of newly issued subsidiary stocks (equity carve-outs) is explained by the reporting distortions in the pre-IPO period, conditioned on whether the executives and directors of the subsidiary received stock options with an exercise price equal to the IPO offer price. I show that the predictive power of the accruals on future returns and its direction differ depending on the executive compensation packages, suggesting that management intentionally manipulate earnings. In the second chapter I find that carve-outs that did not grant incentive stock options subsequently underperform both relative to the overall market and relative to a sample of carve- outs that granted stock option in three-year window. My results point that incentive stock options are signaling better corporate governance to the market that result in better long-run stock market and accounting performance. The third chapter examines short sales transaction volumes on the first trading day of initial public offerings (IPOs). The tests provide evidence of informed trading immediately at the IPO. Results reveal that short selling volume on the first trading day of the IPO is significantly negatively linked to subsequent stock returns and accounting performance. Further I show that heavily-shorted IPOs have the highest probability of analyst downgrades within the first year after the IPO. Overall, the results indicate that short sellers are important contributors to efficient stock prices

Strategic M&A announcement timing, information asymmetry and behavioral biases

Mergers and acquisitions (M&As) are among the largest and most important corporate events. Companies acquire other companies for a variety of reasons. The most quoted one is without any doubt the potential additional value from combining two firms, better known as synergy, while the most obscure and the most controversial one is probably the elimination of future competition. No matter what the main motive is, measuring M&A future benefits is not an easy task and is probably more art than exact science. To get a bottom line number, apart from future cash flows, investors also need to assess a number of qualitative aspects of a deal, such as the compatibility of corporate cultures of the transaction parties, managers’ skill in M&A execution etc. With all these uncertainty levels piled up, information asymmetry makes it even harder for managers to clearly communicate the real value of a deal. What they do in such a situation and how investors respond is not obvious. In my thesis, I advocate that managers indeed put effort to overcome the issue of how to convey deal quality. Specifically, I investigate the following scenarios: managers select the best time to announce a deal and/or they effectively disclose deal quality in the announcement press releases. The first alternative is also known as strategic announcement timing

Objectifs de la gestion des résultats comptables et marchés financiers

Cet article se propose d'analyser les objectifs sous-jacents à la gestion des résultats sans restreindre cette dernière à la gestion comptable des résultats : minimisation, maximisation ou lissage des résultats. La gestion des résultats est particulièrement observée lors des opérations financières de l'entreprise : introduction en bourse, augmentation de capital. Des études récentes ont mis en évidence des comportements visant à modifier la perception des marchés financiers : éviter de publier une perte, publier un résultat proche de certains seuils...L'article s'intéresse à ces dernières études.gestion des résultats ; effets seuil

Vers une analyse financière indépendante?

Nous analysons les activités des analystes financiers et leur valeur ajoutée, les pressions pesant sur l’indépendance des analystes, et l’accord global de 2002 aux Etats-Unis et son impact sur le développement d’une analyse financière indépendante. Les analystes financiers sont potentiellement confrontés à de nombreuses pressions sur leur indépendance. Ces pressions sont inhérentes à la multiplicité de leurs activités, et ne sont pas toutes à mettre au compte de conflits d’intérêt. L’accord global de 2002 ne pourra résoudre au mieux qu’une partie des problèmes auquel il était censé répondre. Au pire, il pourra en résulter des effets pervers, y compris pour les investisseurs.We analyze financial analysts’ activities and their added value, the pressures on analyst independence, and the 2002 Global Agreement in the U.S. and its impact on independent financial analysis. Financial analysts are potentially confronted with many pressures on their independence. These pressures are inherent to the multiplicity of their activities, and are not necessarily due to conflicts of interest. The 2002 Global Agreement, at best, can only solve part of the problems it was supposed to address. At worst, it may have unintended negative consequences, including for investors

An empirical study of information flows and conflicts of interests in brokerage business and mutual fund industry

In my PhD thesis I unveil somewhat controversial trading practices and conflicts of interests in mutual fund industry and brokerage business. I aim to provide empirical evidence of premature information diffusion in capital markets. The novel data and identification approach of the study allows answering the questions so far not answered in the literature. In Chapter I of my thesis, I study a pre-release of research information by brokerage houses to their important clients. Using high-frequency trading data from Abel Noser Solutions (ANcerno), I investigate trading of individual institutions ahead of recommendation release. I find that large institutions and frequent traders trade in the direction of the Strong Buy and Buy initiations in the 5-day period before the announcement. In Chapter 2, prepared in collaboration with Alexander Eisele and Gianpaolo Paise, I investigate private information flows and trading practices inside mutual fund families when one of the funds in the family experiences a severe distress due to investor redemptions. The main academic contribution of the research paper is the empirical evidence in support of a family-coordinated predation of the distressed funds inside investment fund families

Financial analysts and information flows in the markets

The aim of this research project is to discuss the information flow between managers, analysts and investors in the financial markets. It examines the official information releases such as quarterly earnings announcements, unofficial flows of information between managers and analysts, and uncertain information as interpretation of managers' actions, so-called "signals", used by analysts and investors. The agency problem created by informational inequality of the market participants creates numerous opportunities for manipulations. Managers may not only withhold or misinterpret the information, but they are also able to exercise the pressure on third-parties. Financial analysts are not completely independent of company executives: they need to co-operate with managers to get an access to the information and their employers prefer to keep good relationships with the potential clients for investment banking deals. As a result the investors constantly face the challenge how to evaluate the trustworthiness of external information and how to extract the maximum from the news announced. The two first chapters of this thesis discuss particular potential ways to address this challenge. Chapter 1 adds to the existing literature on analysts' accuracy and conflicts of interests of informational intermediaries in financial markets by studying the problem of trustworthiness of news produced by sell-side analysts. I investigate whether the analysts who are first to switch from positive to negative recommendation about a company are trustworthy. Is it a signal of independence and professionalism or a warning signal of lack of connections with the firm? I find that these analysts have limited access to management-provided information and therefore are not reliable news bringers. Chapter 2 investigates the abilities of textual analysis of earnings announcement conference calls to provide analysts and investors with valuable incremental information beyond the facts stated by managers. It studies how the negativity of manager's word choice, degree of uncertainty in his speech and other textual clues may help to predict the future earnings and likelihood of financial distress. The agency problem hits not only investors, but the managers as well. As the investors aware of potential conflict of interest suspiciously scrutinize any executive's action, the latter lose the flexibility for the actions. As an example, an executive may abstain from rebalancing his portfolio to avoid providing negative signals to the markets by the sale of company's shares. The third chapter examines the potential to attenuate market reaction to the negative signals. I test whether the companies with more timely and extensive coverage are less constrained by "signaling" problem - losses in value caused by the investors' reaction on managers' actions

Quid pro quo in IPOs: why book-building is dominating auctions

The book-building procedure for selling initial public offerings to investors hascaptured significant market share from auction alternatives in recent years, despite significantly lower costs in both direct fees and initial underpricing when using the auction mechanism. This paper shows that in the French market, where the frequency of book-building and auctions was about equal in the 1990s, the ostensible advantages to the issuer using book-building were advertising-related quid pro quo benefits. Specifically, we find that book-built issues were more likely to be followed and positively recommended by the lead underwriters and were also more likely to receive “booster shots” post issuance if the shares had fallen. Even non-underwriters’ analysts appear to promote book-built issues more, but only when their underwriters stood to gain from acquiring shares in future issues from the recommended firm’s lead underwriter. Bookbuilt issues also appeared to garner more press in general (but only after they had chosen book-building, not before). Yet, we do not observe valuation or return differentials to suggest that these types of promotion have any value to the issuing firm. We conclude that underwriters using the book-building procedure have convinced issuers of the questionable value of advertising and promotion of their shares

The ecology of risk taking

We analyze the risk level chosen by agents who have private information regarding their quality. We show that even risk-neutral agents will choose risk strategically to enhance their reputation in the market, and that such choices will be influenced by the mix of other agents’ types. Assuming that the market has no strong prior about whether the agents are good or bad, good agents will choose low levels of risk, and bad agents high levels. Empirical evidence is gathered on 2462 firms over 24 years. The results support the model: agents of higher quality have less variable performance