Research

Investment Banks in the Corporate Board and Their Role in Bond Pricing 

The paper examines the role of interlocking connections between investment banks and firms’ executives and directors in corporate bond underpricing and underwriting fees proxied by gross spread. The results show that interlocking leads to more accurate bond pricing and significantly lower excess initial returns on newly issued bonds by reducing bond underpricing by approximately 6.2-14.2 bps, which represents approximately $960,000 less money “left on the table” at the time of bond issuance. At the same time, interlocking tends to increase gross spread. Additional tests show that interlocking helps mitigate bond underpricing for high-yield bonds and bond IPOs.

Agapova, A., & Filatova, U. (2023) Analyst Institutional Client Catering and Reputation Tradeoff: Analysts' Strategic Timing of Recommendations. Journal of Accounting, Auditing & Finance. https://doi.org/10.1177/0148558X231198895 

We examine whether sell-side analysts strategically time their favorable recommendations to cater to institutional investors while preserving analysts’ reputational capital. Although prior literature documents that analysts provide more positive recommendations for stocks that are part of their institutional clients’ (specifically, mutual funds’) portfolios, it does not explicitly address a reputation cost associated with such practice. Using a sample of analysts’ recommendations on U.S. firms for the 2002–2017 period, we document a pattern of analysts’ recommendations being more optimistic in the end month of a quarter and less optimistic in the beginning month of a quarter. This timing pattern ties to quarterly reporting periods of portfolio managers, with actively managed mutual funds’ holdings being affected the most. Analysts with Institutional Investor All-Star ranking do not engage in such stock recommendation timing practices. The market participants seem to believe rosy recommendations issued for stocks with more institutional holdings in the end month of a quarter with more positive cumulative abnormal returns to upgrade and downgrade recommendations.

• Positive versus Negative ESG Portfolio Screening and Investors' Preferences, with Anna Agapova and Ivan Yuk

Environmental, Social, and Governance (ESG) practices are becoming central to firm evaluation, though their financial impact is debated. Investors use positive, negative, or combined screening to assess ESG criteria. Negative screening, rooted in religious practices, excludes sectors like tobacco, alcohol, and gambling, but may limit options and underperform 'sin' stocks. Positive screening favors companies excelling in ESG, offering diverse strategies and potentially better risk-adjusted returns. This study analyzes investor preferences for ESG screening in U.S. mutual funds from 2002 to 2020. Funds with positive screening attract higher net flows overall, with returns similar across all screening types. Retail investors are less sensitive to positive screening than institutional investors, and flows to these funds rise during bear markets. Positive screening also outperforms combined screening in net flows, while negative and combined screening show no significant differences. 

• The Role of Religiosity in Loan Repayment in Microfinance Institutions, with Rebel Cole and Sara Khaled 

We examine the role of local religiosity in loan repayment in microfinance institutions (MFIs) using a general measure of religiosity from the World Value Surveys (WVSs) that represents the importance of religion in people’s lives regardless of their religion. We further investigate if MFIs in more religious nations are more ethically oriented and are willing to fight poverty and support the poorest of the poor in the country. We find that MFIs in more religious countries show lower operational self-sufficiency and a higher loan loss rate, write-off ratio, and portfolio at risk over 30 days. Our results are in line with our assumptions that MFIs in more religious nations are more ethically oriented and lend to lower-quality borrowers to support the poorest population of the country. Our findings support Casselman, Sama, and Stefanidis’s (2014) conclusion that religiously affiliated MFIs show better social performance. Consistent with prior studies, female borrowers do not show a significantly different credit loss than male borrowers. However, women have significantly lower portfolio-at-risk ratios, but the results are mitigated in highly religious societies, which also supports the view that MFIs in more religious nations that focus on female borrowers target the lower-quality group that is more in need of financial support. 

• Cultural Bias in Cross-Border Mergers and Acquisitions, with Luis García-Feijóo  

We examine whether the difference in perceptions of trustworthiness impacts cross-border mergers and acquisitions. We use Eurobarometer surveys conducted from 1982 to 1996 to construct the measure of bilateral trust and cultural bias as a residual of the regression of trust on the country and time-fixed effects. Our preliminary results suggest that cultural bias plays a significant role in explaining the volume of cross-border mergers.

Political Values and Their Role in the Analysts’ Coverage of Environmentally Friendly Firms

Equity Crowdfunding Platforms, with Douglas Cumming and Robert S. Reardon