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tests whether firms undertaking SEOs when facing poor growth opportunities, mea-
sured by market to book ratios, are experiencing agency conflicts between managers
and shareholders. Consistent with this hypothesis, they find that some firms with poor
growth opportunities do undertake SEOs and that these firms have more negative an-
nouncement effects.Ljungqvist and Wilhelm (2003)finds that managers participating
in friends and family programs and not making secondary offerings are more apt to have
underpriced IPOs.Datta, Iskandar-Datta, and Raman (2005)presents indirect evidence
that on average SEO announcement effects are positively related to managers’ equity
based compensation, so greater equity based compensation is associated with less neg-
ative announcement effects.Kim and Purnanandam (2006)reports a similar finding.
Turning to the management compensation effects of IPOs,Lowry and Murphy (2006)
examines whether IPOs are underpriced more because managers obtain more valuable
stock options with lower strike prices (set at the offer price) when new stock option plans
are established at the IPO date. They find no evidence of a positive relation between
underpricing and IPO option grants, which does not support a serious conflict of interest
effect.
A second avenue of concern is that underwriters may have conflicts of interest with
their customers due to joint production of underwriting and other financial services in-
cluding brokerage, market making, security analysis, venture capitalist investing, lend-
ing and asset management, to name a few. Many researchers have investigated whether
the joint production of these services creates serious conflicts of interest or whether
there are significant economies of scale or scope realized from sharing financial in-
formation produced in the course of performing one or more of these services. Since
financial service providers need timely information about customers’ financial strength,
joint production of information or sharing of this information can be particularly cost
efficient.
Of all of these related services, the area that has elicited the most research inter-
est is security analysis by underwriting firms. Underwriters seek to reduce the time
and expense of selling a security offer and to lower their risk of offer failure, and the
question is whether these incentives dominate the analyst’s reputation concerns near
security offering dates, causing sell-side analysts to hype these issues through overly
optomistic earnings forecasts and investment recommendations.Michaely and Wom-
ack (1999)report evidence of such a bias. However, more recent evidence does not
support this finding.Kadan et al. (2005)report that after the 2002 NYSE and NASD
rules regulating sell side analyst’s investment banking relationships, there is no evi-
dence that analysts issue optimistic earnings forecasts. However, these same analysts
remain reluctant to recommend selling stocks that their investment banking arms are
underwriting. Other studies that find affiliated analysts do not make more optimistic
earnings forecasts includes:Kolasinski and Kothari (2004), O’Brien, McNichols, and
Lin (2005), Barber et al. (2005), Agrawal and Chen (2004)andLjungqvist, Marston,
and Wilhelm (2006).
There is a stream of literature includingPuri (1994, 1996, 1999), Gande et al. (1997),
Schenone (2004), Chaplinsky and Erwin (2005), Drucker and Puri (1989)andLi and