We attempt to measure the effect of competition on bias in the context of analyst earnings forecasts, which are known to be excessively optimistic because of conflicts of interest. Our natural experiment for competition is mergers of brokerage houses, which result in the firing of analysts because of redundancy (e.g., one of the two oil stock analysts is let go) and other reasons such as culture clash. We use this decrease in analyst coverage for stocks covered by both merging houses before the merger (the treatment sample) to measure the causal effect of competition on bias. We find that the treatment sample simultaneously experiences a decrease in analyst coverage and an increase in optimism bias the year after the merger relative to a control group of stocks, consistent with competition reducing bias. The implied economic effect from our natural experiment is significantly larger than estimates from OLS regressions that do not correct for the endogeneity of coverage. This effect is much more significant for stocks with little initial analyst coverage or competition.
{"title":"Competition and Bias","authors":"Marcin T. Kacperczyk, Harrison G. Hong","doi":"10.2139/ssrn.1101626","DOIUrl":"https://doi.org/10.2139/ssrn.1101626","url":null,"abstract":"We attempt to measure the effect of competition on bias in the context of analyst earnings forecasts, which are known to be excessively optimistic because of conflicts of interest. Our natural experiment for competition is mergers of brokerage houses, which result in the firing of analysts because of redundancy (e.g., one of the two oil stock analysts is let go) and other reasons such as culture clash. We use this decrease in analyst coverage for stocks covered by both merging houses before the merger (the treatment sample) to measure the causal effect of competition on bias. We find that the treatment sample simultaneously experiences a decrease in analyst coverage and an increase in optimism bias the year after the merger relative to a control group of stocks, consistent with competition reducing bias. The implied economic effect from our natural experiment is significantly larger than estimates from OLS regressions that do not correct for the endogeneity of coverage. This effect is much more significant for stocks with little initial analyst coverage or competition.","PeriodicalId":176411,"journal":{"name":"FA1: Fund Management","volume":"33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114856997","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We test two hypotheses about the determinants of closed-end fund premia and discounts using a comprehensive sample of non-taxable and taxable funds for the period 1988 to 2002. We test whether fund premia reflect agency costs, and the potential tax liability associated with unrealized capital gains by examining changes in fund premia around the declaration day of large dividend and capital gain distributions. We provide further evidence on the effect of the tax liability from unrealized capital gains by examining changes in the premium around the ex-day of capital gain distributions. Our results lend support to both agency cost and the capital gains tax explanations for fund premia and discounts. We also find that the market prices of municipal bond funds (which pay tax-free dividends) are more sensitive to capital gains tax liabilities than are the prices of taxable funds, which is consistent with the existence of tax clienteles among closed-end fund investors.
{"title":"Capital Gains Taxes, Agency Costs, and Closed-End Fund Discounts","authors":"M. Brennan, R. Jain","doi":"10.2139/ssrn.1020210","DOIUrl":"https://doi.org/10.2139/ssrn.1020210","url":null,"abstract":"We test two hypotheses about the determinants of closed-end fund premia and discounts using a comprehensive sample of non-taxable and taxable funds for the period 1988 to 2002. We test whether fund premia reflect agency costs, and the potential tax liability associated with unrealized capital gains by examining changes in fund premia around the declaration day of large dividend and capital gain distributions. We provide further evidence on the effect of the tax liability from unrealized capital gains by examining changes in the premium around the ex-day of capital gain distributions. Our results lend support to both agency cost and the capital gains tax explanations for fund premia and discounts. We also find that the market prices of municipal bond funds (which pay tax-free dividends) are more sensitive to capital gains tax liabilities than are the prices of taxable funds, which is consistent with the existence of tax clienteles among closed-end fund investors.","PeriodicalId":176411,"journal":{"name":"FA1: Fund Management","volume":"62 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129655585","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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