Analyst Behavior and Underwriter Choice
We examine the role that analysts play in a firm's choice of underwriter using a sample of major U.S. investment banks. In order to best capture the competitive environment, which is critical to the potential role that analysts play, we limit our sample of firms to 161 real estate investment trusts (REITs) issuing debt or equity between 1996 and 2004. Using the estimation technique of Ljungqvist et al. (Journal of Finance 61:301–340 2006), which accounts for the endogeneity of analyst behavior and the coverage self-selection decision, we find that target prices that are optimistic relative to competitors' target prices, significantly increase an underwriter's probability of attracting underwriting business. This result holds for both equity and debt issues with fees greater than one million dollars. We also find evidence consistent with the notion that increased regulatory scrutiny of conflicts of interest between analysts and investment banks has decreased the impact of analyst behavior on underwriter choice.
KeywordsREITs Analysts Underwriters
We are grateful to Yakov Amihud, Stephen Brown, Bill Greene, Victoria Ivashina, Alexander Ljungqvist, Yang Lu, Amrut Nashikkar, Tony Saunders, Jonathan Spitzer, Charles Trczinka and Robert Whitelaw and seminar participants at AREUEA 2007 in Chicago, Cornell University, George Washington University, NYU and UNC Chapel Hill for helpful comments. We thank our discussant, James Booth, and other participants at the October 2008 DePaul University REIT Symposium for constructive criticism. Finally, we acknowledge the assistance of the editor, Jim Shilling, and two anonymous referees in improving this study. Jared Chung and Eric Su provided excellent research assistance. All errors are our own.
- Boudry, W. I. (2010). An analysis of REIT dividend payout policy, Working paper, Stern, NYU.Google Scholar
- Boudry, W. I., Kallberg, J. G., & Liu, C. H. (2007). Fundamentals and institutional investment: The dynamics of REIT returns, Working Paper, Stern, NYU.Google Scholar
- Bradshaw, M., Richardson, S. A., & Sloan, R. G. (2003). Pump and dump: An empirical analysis of the relation between corporate financing activities and sell-side analyst research, Working Paper, University of Michigan.Google Scholar
- Cole, B. M. (2001). The pied pipers of wall street. Princeton: Bloomberg.Google Scholar
- Drucker, S., & Puri, M. (2005). On the benefits of concurrent lending and underwriting. Journal of Finance, 77, 673–699.Google Scholar
- Ellis, K., Michaely, R., & O’Hara, M. (2005) Competition in investment banking: Proactive, reactive, or retaliatory? Working Paper, Cornell University.Google Scholar
- Gasparino, C. (2005). Blood on the street: the sensational inside story of how wall street analysts duped a generation of investors. Free Press.Google Scholar
- Maddala, G. S. (1983). Limited dependent and qualitative variables in econometrics. Cambridge: Cambridge University Press.Google Scholar
- O'Brien, P. C., & Bhushan, R. (1990). Analyst following and institutional ownership. Journal of Accounting Research, 55–76, Supplement.Google Scholar