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Research Update
Analyzing the Analysts
In recent years, articles in the financial press have suggested that
investment banks have a conflict of interest when their own analysts
recommend a stock the bank is underwriting. In a series of research
reports, associate professor of accounting Maureen McNichols and
doctoral student Hsiou-wei Lin are investigating how underwriting
relationships influence analysts' recommendations and trying to
determine what factors motivate analysts and affect the kinds of
information they disclose.
In their paper, "Underwriting Relationships and Analysts'
Research Reports," the two researchers studied the seasoned equity
offerings of large publicly traded firms between 1979 and 1992, with an
emphasis on the last five years. They were not surprised to learn that
investment bank analysts issue more favorable earnings forecasts for
their firms' underwriting clients than do analysts unaffiliated with the
underwriter. "Underwriters' analysts may be behaving strategically
to respond to the investment banking interests of the firm, or the bank
may have been given the business because the nature of the information
they had about the firm is more favorable than that of other investment
banks," McNichols says.
What is surprising, though, say Lin and McNichols, is that
"while we find underwriter analyst reports are more favorable, we
find no evidence that their forecasts are less accurate than those
issued by non-underwriters." Nor do they find evidence to suggest
that underwriter analysts are pressured by their employers to alter
negative reports. But they did see a greater frequency of favorable
recommendations for firms generating the largest fees, suggesting a
certain self-interest on the part of the analysts. Investors may
eventually sense a bias. They place less weight on the forecasts of
underwriter analysts in the post-offering period, Lin and McNichols
found.
In a second paper, still to be published, McNichols and Lin examine
analysts' relationships to firms that have recently gone public.
"We have been able to document that, in the year following an
initial public offering, 50 percent of the analysts covering the company
are actually affiliated with the underwriter who took the company
public," says McNichols. IPO forecasts are more favorable when they
are issued by an affiliated company — in fact, the difference in
affiliated analysts' bias is greater with initial public offerings than
with seasoned equity offerings, McNichols says. "It's very
interesting that, given the more biased reports, there are so few
unaffiliated analysts out there to counteract the affiliated
analysts."
Affiliated analysts are also more likely to cover overpriced stocks
than are unaffiliated analysts. "One anomaly is that when a firm
goes public, there's a stock price jump of about 16 percent in the first
day. In the following year, the offering underperforms the market by an
average of about 15 percent," McNichols says. "We've found in
our sample that the offerings that have only affiliated coverage or no
coverage at all underperform the market by about 20 percent in the first
year. IPOs for which there is the greatest independent coverage tend to
do better, underperforming on average by about 7 percent."
Does this mean independent analysts deliberately choose to cover
stock offerings that they expect to perform well? A third paper will
consider that question. "All of these findings are of particular
interest to accountants," McNichols notes. "Financial analysts
play a central role in the processing and interpretation of financial
statement information."
Greener Classes at Business Schools
Environmental protection costs now account for about 2 percent of the
U.S. gross national product, with environmental expenditures climbing to
more than 10 percent of the operating costs in some industries.
A survey conducted by the nonprofit Management Institute for
Environment and Business (MEB) found that business leaders believe that
environmental issues will become even more crucial in the near future,
and many business schools are moving to better understand and teach the
interactions between the environment and the economy. The MEB invited
Stanford to join a partnership with other schools to develop models for
effective integration of environmental issues into business school
education. MEB board members include James Patell, Herbert Hoover
Professor of Public and Private Management, and William F. Miller,
professor of public and private management, who serves as MEB
chairman.
"In 1987, very few of the nation's 700 business schools offered
environmental management courses," said Miller in his introduction
to the report, Environmental Progress: The Role of Business Schools.
"Today, there are courses offered or under development at more than
50 schools."
At Stanford, projects include the following:
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A module on total quality environmental management, taught by Patell,
utilizes materials developed by MEB and AT&T's Columbus Works. The
module is included in the new MBA elective Total Quality Management and
in the summer Stanford Executive Program. Patell also uses the
Environmental Self-Assessment Program, codeveloped by the Global
Environmental Management Initiative and Deloitte & Touche, a project
led by Charles McGlashan, MBA '91.
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The Strategic Executive Program in Mexico — offered in conjunction with
the Monterrey Institute of Technology and Higher Education — includes
discussions of economic and trade issues involving the
environment.
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The course Environmental Management and Policy Analysis, was developed
by Jeremy Bulow, professor of economics.
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Research by William Lovejoy, associate professor of operations
management, involves linear programming to study product introduction
strategies, each of which has significant environmental
implications.
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The course Management Strategies in the Nonprofit Environment, taught by
Robert Augsburger, lecturer in management, uses case studies of
conservation groups operating in Latin America.
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