Investment Banking

24 Results

 

The Use of Broker Votes to Reward Brokerage Firms’ and Their Analysts’ Research Activities

Broker votes are one of the most pervasive yet least understood reporting practices on Wall Street. The votes are essentially ratings of the value of brokers' investment research services. These ratings are produced by institutional investors (the "buy side") and solicited by broker dealers (the "sell side"). Little research to date, however, has examined the determinants of broker votes, their consequences, and their economic function. In this paper the authors use data gathered from a mid-sized investment bank for the years 2004 to 2007 in order to study how broker votes are related to institutional investors' commission payments and analysts' client services and compensation. Results overall suggest that broker votes help to facilitate implicit contractual relationships between sell-side brokers, their affiliated analysts, and their buy-side clients. Broker votes are neither mere popularity contests nor a simple reflection of trading in analysts' covered stocks. Instead, they appear to be a key component of the investment research industry's contracting technology, acting as the nexus for a set of relationships between sell-side brokers, their affiliated analysts, and their buy-side clients. The findings thus deepen our understanding of how information is exchanged on Wall Street and help to explain why the practice of collecting and aggregating client votes—a costly internal reporting procedure—has stood the test of time and has been replicated across countless sell-side research departments. Read More

Lehman Brothers Plus Five: Have We Learned from Our Mistakes?

Is the US financial system in better shape today than it was five years ago? Finance professors Victoria Ivashina, David Scharfstein, and Arthur Segel see real progress—but also missed opportunities and more challenges. Open for comment; 2 Comments posted.

Faculty Symposium Showcases Breadth of Research

Faculty present their latest research on the human tendency toward dishonesty, the use of crowdsourcing to solve major scientific problems, and the impact of private equity investments. Closed for comment; 3 Comments posted.

Legislating Stock Prices

This paper examines the importance of firms' relationships with their legal and political environment, and the actors who form this environment. Governments pass laws that affect firms' competitive landscape, products, labor force, and capital, both directly and indirectly. And yet, it remains difficult to determine which firms any given piece of legislation will affect, and how it will affect them. By observing the actions of legislators whose constituents are the affected firms, the authors gather insights into the likely impact of government legislation on firms. Specifically, the authors demonstrate that legislation has a simple yet previously undetected impact on firm prices. Read More

The Stock Selection and Performance of Buy-Side Analysts

Important differences between buy- and sell-side analysts are likely to affect their behavior and performance. While considerable research during the last twenty years has focused on the performance of sell-side analysts (that is, analysts who work for brokerage firms, investment banks, and independent research firms), much less is known about buy-side analysts (analysts for institutional investors such as mutual funds, pension funds, and hedge funds). This paper examines buy recommendation performance for analysts at a large, buy-side firm relative to analysts at sell-side firms throughout the period of mid-1997 to 2004. The researchers find evidence of differences in the stocks recommended by the buy- and sell-side analysts. The buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst, and market capitalizations almost seven times larger. These findings indicate that portfolio managers (buy-side analysts' clients) prefer that buy-side analysts cover less volatile and more liquid stocks. The study also finds that the buy-side firm analysts' stock recommendations are less optimistic than their sell-side counterparts, consistent with buy-side analysts facing fewer conflicts of interest. This and future studies may help sell-side and buy-side executives to allocate their financial and human resources more strategically. Read More

Private Meetings of Public Companies Thwart Disclosure Rules

Despite a federal regulation, executives at public firms still spend a great deal of time in private powwows with hedge fund managers. Eugene F. Soltes and David H. Solomon suggest that such meetings give these investors unfair advantage. Closed for comment; 5 Comments posted.

Are There Too Many Safe Securities? Securitization and the Incentives for Information Production

Markets for near-riskless securities have suffered numerous shutdowns in the last 40 years, with the recent financial crisis the most prominent example. This suggests that instability could be a general characteristic of such markets, not just a one-time problem associated with the subprime mortgage crisis. Professors Samuel G. Hanson and Adi Sunderam argue that the infrastructure and organization of professional investors are in part determined by the menu of securities offered by originators. Since robust infrastructure is a public good to originators, it may be underprovided in the private market equilibrium. The individually rational decisions of originators may lead to an infrastructure that is overly prone to disruptions in bad times. Policies regulating originator capital structure decisions may help create a more robust infrastructure. Closed for comment; 0 Comments posted.

What’s Government’s Role in Regulating Home Purchase Financing?

The Obama administration recently proposed housing finance reforms to wind down Fannie Mae and Freddie Mac and bring private capital back to the mortgage markets. HBS professor David Scharfstein and doctoral student Adi Sunderam put forth a proposal to replace Fannie and Freddie and ensure a more stable supply of housing finance. Read More

Lawful but Corrupt: Gaming and the Problem of Institutional Corruption in the Private Sector

In the business world, "gaming" refers to the act of subverting the intent of rules or laws without technically breaking them--a skillful if unsavory way to achieve private gain. Harvard Business School professor emeritus Malcolm S. Salter explores how gaming the system can lead to institutional corruption, citing examples from Enron and early efforts by some banks to game the implementation of the Dodd-Frank financial reform act. Read More

Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge

In August 2010, the Security and Exchange Commission announced a highly anticipated rule that would make it easier for investors to nominate new board members and get rid of existing ones. It allowed shareholders to have their board candidates included in the company's proxy materials--if those shareholders had owned at least 3 percent of the firm's shares for at least the prior three years. On October 4, the SEC unexpectedly and indefinitely postponed the implementation of that rule, pending the outcome of a lawsuit aimed at overturning it. This paper gauges the significance of the proxy access rule by measuring whether certain firms gained or lost market value on news of the delay. Research was conducted by Harvard Business School professors Bo Becker, Daniel Bergstresser, and Guhan Subramanian. Read More

Decoding Inside Information

Price setters and regulators face a difficult challenge in trying to understand the stock trading activity of corporate insiders, especially when it comes to figuring out whether the activity is a good indicator of the firm's financial future. This National Bureau of Economic Research paper discusses how to distinguish "routine" trades (which predict virtually no information about a firm's financial future) from "opportunistic" trades (which contain a great deal of predictive power). Research was conducted by Harvard Business School professors Lauren Cohen and Christopher Malloy and Lukasz Pomorski of the University of Toronto. Read More

How Did Increased Competition Affect Credit Ratings?

When Fitch Ratings took on Standard & Poor's and Moody's as an alternative credit rating agency in the 1990s, there was a general assumption that the increased competition would lead to higher-quality corporate debt ratings from the incumbents. In fact, their ratings quality declined during the 10-year study period, according to Harvard Business School's Bo Becker and Washington University's Todd Milbourn. One possible cause: competition weakens reputational incentives that drive ratings quality. Read More

Crashes and Collateralized Lending

This paper presents a framework for understanding the contribution of systematic crash risk to the cost of capital for a variety of different types of securities. The framework isolates the systematic crash risk exposure of different collateral types (equities, corporate bonds, and CDO tranches), and provides a simple mechanism for allocating the cost of bearing this risk between a financing intermediary and investor. Research was conducted by Jakub W. Jurek (Bendheim Center for Finance, Princeton University) and Erik Stafford (Harvard Business School). Read More

The New Deal: Negotiauctions

Whether negotiating to purchase a company or a house, dealmaking is becoming more complex. Harvard Business School professor Guhan Subramanian sees a new form arising, part negotiation, part auction. Call it the negotiauction. Here's how to play the game. Read More

Government’s Misguided Probe of Private Equity

The U.S Department of Justice has begun an inquiry into potentially anti-competitive behavior on the part of leading private equity firms. Professor Josh Lerner looks to history to underscore why this move carries the prospect of damaging what is actually an incredibly competitive industry that creates much value. Read More

Inexperienced Investors and Market Bubbles

The evidence isn't conclusive, but new research from Harvard Business School suggests younger fund managers may have contributed to the tech stock bubble. Professor Robin Greenwood discusses the research paper, "Inexperienced Investors and Bubbles," and what mutual fund investors should keep in mind. Read More

‘UpTick’ Brings Wall Street Pressure to Students

Money managers work in a stressful, competitive pressure cooker that's hard to appreciate from the safety of a business management classroom. That's why HBS professors Joshua Coval and Erik Stafford invented upTick—a market simulation program that has students sweating and strategizing as they recreate classic market scenarios. Read More

Should CEOs of Public Companies Offer Earnings Guidance?

A small but growing chorus of public company CEOs is deciding not to provide quarterly earnings guidance. Is this a good or bad development for shareholders, investors, analysts, the marketplace, and the company’s short- and long-term health? Closed for comment; 17 Comments posted.

VCs Survey Post-Bubble Opportunities

At the annual Cyberposium conference held at Harvard Business School, venture capitalists pondered what makes for winners and losers in the new VC landscape. Read More

Float Manipulation and Stock Prices

When a firm reduces the number of shares available to trade, so-called float manipulation, the price of the stock is often driven up. The author uses a series of 2,000 stock split events in Japan as an experiment to understand the consequences of float manipulation for stock prices. The conclusion: Stock prices are raised significantly when there are differing opinions about the value of shares, investors are unable to sell short, and the number of outstanding shares is reduced. Read More

A Cross-Sectional Analysis of the Excess Comovement of Stock Returns

This paper develops cross-sectional predictions from a model in which the excess comovement of stock returns comes from correlated demand shocks. The model is tested on 298 Nikkei index stocks and 1,458 non-index stocks for the years 1993 through 2003. The study finds that controlling for index membership, index overweighting is a significant determinant of the comovement of returns with index returns. Read More

Analyst Disagreement, Forecast Bias and Stock Returns

It is well documented that financial analysts' opinions are reflected in stock prices. The problem: Analysts often operate under incentives that are inconsistent with telling the truth. Retail investors, who tend to be less sophisticated, may fail to make proper adjustments for the more nuanced of the resulting biases, some of which might be reflected in market prices. To study the scope of market efficiency, Scherbina studied analysts' incentives, resulting forecast biases, and their potential impact on market prices. Read More

A Bold Proposal for Investment Reform

Do the markets need an investor's union? Should company audits be overseen by stock exchanges? If you want to restore investor confidence, think radical reforms, say professors Paul Healy and Krishna Palepu. Read More

Where Main Street Meets Wall Street

Its phenomenal growth, based on its near-perfect fit with consumer needs and aspirations, has made the mutual fund one of this century's big success stories. How is it adapting to the age of the Internet and 21st century change? HBS Professors Jay O. Light and Peter Tufano and three alumni take a look at the state of the mutual fund industry 75 years after its beginnings in Boston's financial district. Read More