Conflict Of Interest Hypothesis Research Articles

A new dimension of investment forecasting: Evidence from Thailand

This study explores three major issues in mutual fund portfolio management in one of the emerging markets - Thailand. The first issue is to examine mutual fund managers' ability to time market coskewness by testing whether fund managers shift portfolio exposure when market coskewness changes which could be observed from changing in beta coefficient. The second issue is whether market coskeweness helps the mutual fund managers quest for alpha (superior) portfolio return. The third issue is to examine whether mutual funds managers' behaviours could be explained by the structure between bank and mutual fund relationship. Based on the analysis of 332 unique funds between January 2000 and November 2017, the results demonstrate that the good performing fund managers adjust their portfolio beta basing on changing in market coskewness. Outperform fund managers increase their portfolios' beta by 8.88% more than that of bottom performing fund managers. Besides, we find that both outperformed bank-related and non-bank-related mutual fund managers demonstrate an ability to time market coskewness. However, we find that non-bank-related mutual fund outperform bank-related mutual funds which support the conflict of interest hypothesis.

Do Capital Markets Punish Tunneling Behaviour of Business Groups? Agency Perspective of Related Party Transactions

This study examines that do capital markets punish the tunneling behaviour of business groups in a unique institutional setting of Pakistani group firms. For this purpose, data of 207 non-financial firms belonging to various business groups were taken as a sample from 2006 to 2018. The Ordinary Least Square and Two Stages Least Square regression models are estimated. The results of various estimated models showed that both accounting performance and market valuation of the sample firms are negatively influenced by related party transactions (RPTs). Therefore, these transactions are assumed to be a means of conflict by the market participants and consistent with the tunneling perspective and conflict of interest hypothesis. These results support the notion that capital market pressure acts as a disciplinary device and punish the tunneling behaviour of the group firms. Besides capital markets, the regulatory framework and corporate governance (CG) mechanisms, therefore, should be improved in such a way to reduce the tunneling of minority shareholder's wealth. Moreover, external auditors shall devise stringent procedures to evaluate the reported RPTs to minimize its negative effects. This study also contributes to agency theory and tunneling aspect of RPTs in case of emerging markets. Main limitation of the current study is small sample size because majority of the group firms are not listed with Pakistan Stock Exchange and their annual reports are not publically available.

The Economic Consequences of Audit Market Competition: Evidence from Cost of Bank Financing

This paper studies the effect of audit market competition on the clients' cost of bank loans. Exploiting the demise of Arthur Andersen, which differently reduced the local audit market competition of metropolitan statistical areas (MSAs), we find that auditor competition increases the cost of bank loans of auditors' client firms. Further analysis indicates that this effect is more pronounced when external monitoring with respect to financial reporting is weaker and when a client is more economically important to its auditor. The findings are consistent with the auditor-client conflict of interest hypothesis.

Merger Means of Payment and Analyst's Forecast Bias Before Merger Announcement Date

We find strong evidence that analysts tend to have downward-biased earnings estimates immediately before merger announcement dates when earning announcement date is within a 60 day window prior to merger announcement date. Compared to pure stock deals, acquirer stocks in cash-only deals tend to experience a more pronounced positive earnings surprise on the earning announcement date in the above time frame. An event study within three days window of earning announcement date that is within 60 days prior to M&A announcement date allows us to capture market price reaction toward means of payment impact on near term analysts’ forecast bias. We find 0.72% (0.43%) cumulative abnormal return for the acquirer stocks of cash only (Pure stock) deals during this specific time frame. Our findings complement the analyst’s conflict of interest hypothesis, suggesting analyst’s earnings forecast right before merger announcements may be influenced by merger means of payment.

Institutional shareholders and dividend payout in Malaysia

This study seeks to furnish insights on institutional shareholders by assessing whether higher presence of institutional shareholders leads to higher dividend payout or vice versa in line with a particular version of the agency theory. The panel data consists of 100 Malaysian firms from the trading and services sector of Bursa Malaysia from the years 2005 to 2008. In line with the ‘efficient monitoring hypothesis’ theory of institutional shareholders and in conjunction with the outcome model of dividends, we find the presence of institutional shareholders results in higher dividends payout in Malaysia. In spite of the lower fraction of shareholding by institutional shareholders in Malaysia as compared to developed markets, it is clear from the results that the they in fact bring about a positive impact to the firms they invest in by resulting in higher dividends payments. We have provided a framework linking the two theories of dividends (outcome and substitute) and the three theories of institutional shareholders (efficient monitoring hypothesis, conflict of interest hypothesis and strategic alignment hypothesis) to better analyze the two broad ranging theories into greater depth

Long-run performance of IPOs and the role of financial analysts: some French evidence

This paper examines the long-run performance of French initial public offerings (IPOs) carried out between 1991 and 2005. Using various methodologies, we found that IPOs in our sample performed poorly relative to the comparison portfolios over the 1991–2005 horizon in contrast to that reported by prior studies of the French market. This abnormal long-run performance is more severe for orphan IPOs (those without financial analysts’ recommendations) than for non-orphan IPOs the first year following the offerings (a statistically significant difference). In contrast to the widely held belief, this evidence suggests that analyst coverage is indeed not important to the issuing firm. Investors pay more attention to non-orphan IPOs when they are not book built, venture capital backed, underwritten by a large syndicate and less underpriced. Over the 1991–2005 period, an analyst's affiliation does not appear to matter. This result is inconsistent with the conflict of interest hypothesis. During the first year of issuance, analysts’ recommendations are associated with the success of a newly public firm. However, once we extend the horizon to 3 or 5 years after the issuance, we can find that analysts’ recommendations are not significantly related to the long-run performance of IPOs.

The Performance of Investment Bank-Affiliated Mutual Funds: Conflicts of Interest or Informational Advantage?

AbstractUsing a comprehensive sample of U.S. mutual funds from 1992 to 2004, we find strong evidence that investment bank-affiliated funds underperform unaffiliated funds. Consistent with the conflict of interest hypothesis, we find that affiliated funds hold disproportionately large amounts of stocks of their initial public offering and seasoned equity offering clients. Moreover, worse-performing clients are more likely to be held by affiliated funds. Our results are robust to alternative risk adjustments, portfolio weighting schemes, and regression methodologies. Overall, our findings are consistent with the idea that investment banks use affiliated funds to support underwriting business at the expense of fund shareholders.

Common Advisors in Mergers and Acquisitions: Determinants and Consequences

This paper examines the determinants of merging firms’ choice of a common or separate M&A advisor, and the consequences of this choice on several deal outcomes. We analyze a large sample of acquisitions and account for the endogenous choice of common or separate advisors. We find that common advisors are generally chosen in economically sensible ways. After controlling for other variables, deals with common advisors take longer to complete and provide lower premiums to targets. We also find some evidence of lower target valuations and higher bidder returns in such deals. While there is no significant difference in overall quality between deals with and deals without common advisors, our evidence that deals with common advisors turn out to be somewhat better for acquirers than for targets favors the conflict of interest hypothesis over the deal improvement hypothesis about the role of common advisors. We find no evidence that merging firms avoided sharing advisors during the 1980s, but strong and growing evidence of such avoidance over the following two decades.

Orphan versus Non Orphan IPOs: What Value Stems from the Coverage of Financial Analysts?

This paper examines the long run performance of IPOs carried out between 1991 and 2005. By using various methodologies, we find that IPOs in our sample performed negatively relative to comparison portfolios over the 1991-2005 horizon. This abnormal long run performance is much severe for orphans’ IPOs (without financial recommendation) than non orphans’ IPOs from three to five-year horizon (statistically significant). The evidence suggests that analyst coverage is indeed important to issuing firm but the market do not fully incorporate the perceived value of this coverage. Further analysis reveals that this outperformance by non orphan stems from high coverage.Investors pay more attention for non orphan when IPOs are non venture capital backed, with a small underwriting syndicate and low underpriced. Over the 1991-2005 period, analyst’s affiliation does not appear to matter. This result is inconsistent with the conflict of interest hypothesis (Michaely and Womack, 1999). We establish that analyst recommendations are significantly related to long run performance of IPOs. Hence, we corroborate the crucial role of financial analysts in producing and interpreting IPOs’ financial releases.

A Comparison of Underwriting Costs of Initial Public Offerings by Investment and Commercial Banks

AbstractWe examine differences in underwriting costs between commercial‐bank‐Section‐20‐underwritten initial public offerings (IPOs) and investment‐bank‐underwritten IPOs. Our results suggest that total underwriting costs (gross margin plus underpricing) are significantly lower for commercial bank IPOs. The lower cost for commercial bank IPOs is attributable to less severe underpricing for these issues. Gross margin costs generally do not differ between commercial bank and investment bank issues. Furthermore, we find that the long‐run stock price performance for commercial bank issues is superior to that of investment bank issues. That is, lower underpricing for Section 20 issues may not be a short‐run phenomenon. Rather, there appears to be a favorable outcome for investors in the long run for holding IPOs underwritten by Section 20 commercial banks. These results are inconsistent with the conflict of interest hypothesis often associated with merging commercial and investment bank functions in one organization.

Does Confidential Proxy Voting Matter?

Confidential voting in corporate proxies is a principal recommendation in activist institutional investors' guidelines for corporate governance reforms. This paper examines the impact of the adoption of confidential voting on proposal outcomes through a panel data set of shareholder and management proposals submitted from 1986-98 to 130 firms that adopted confidential voting in those years. Institutional investors promoting confidential voting maintain that private sector institutions have conflicts of interest that prevent them from voting against management even though to do so would maximize the value of their shares; they contend that anonymous ballots will enable such investors to vote their true interest, and thereby anticipate reduced support for management proposals and increased support for shareholder proposals. The paper finds, contrary to confidential voting advocates' expectations, that adoption of confidential voting has no significant effect on voting outcomes. Voting outcomes are best explained by proposal type; neither institutional nor insider ownership, nor prior performance, significantly affect the level of support a proposal receives. Moreover, the conflict of interest hypothesis is not supported in the data, as private institutional holdings post-adoption of the voting reform do not affect the support level for proposals. Confidential voting also does not affect firms' stock performance. The results suggest that institutional investor initiatives directed at confidential voting are not a fruitful allocation of investors' resources