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Detecting Information Pooling: Evidence from Earnings Forecasts after Brokerage Mergers. by Serena Ng & Matthew Shum Discussed by David Becher FDIC Conference on Mergers and Acquisitions of Financial Institutions. Research Question and Motivation.

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Detecting Information Pooling: Evidence from Earnings Forecasts after Brokerage Mergers


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detecting information pooling evidence from earnings forecasts after brokerage mergers

Detecting Information Pooling: Evidence from Earnings Forecasts after Brokerage Mergers

by Serena Ng & Matthew Shum

Discussed by David Becher

FDIC Conference on Mergers and Acquisitions of Financial Institutions

research question and motivation
Research Question and Motivation
  • Do forecasts improve after brokerage mergers?
    • Pooling of information and information resources may improve forecast accuracy
    • Examine stocks where target & bidder analysts retained
      • Compare to those deals where only one analyst retained
        • No information pooling exists
    • Plus distinguish info. pooling from analyst selection
  • Does analyst selection improve forecast estimates?

FDIC Conference on M&A of Financial Institutions

contribution of paper
Contribution of Paper
  • Main Takeaway
    • Interesting paper, asks important and unique questions in the literature
    • Clear others think this is a good paper…
  • Matthew Shum’s Vita
    • Detecting Information Pooling: Analysts' Forecasts After Brokerage Firm Mergers (with Serena Ng)
        • Accepted, Advances in Economic Analysis and Policy

FDIC Conference on M&A of Financial Institutions

what is driving results
What is Driving Results?
  • Authors examine four brokerage mergers
    • 1994 to 2000 - market conditions very different
    • In all deals, majority of analyst from bidder (70% – 90%)
    • Inconsistency in firm selection
      • Two deals involve foreign bidders (Switzerland)
      • Plus, one firm appears as both bidder and target
    • Inconsistency in the merger form
      • One deal involves acquisition of assets (subsidiary)
      • Second deal, target is majority owned by another firm
        • Action of analysts may not be independent

FDIC Conference on M&A of Financial Institutions

what is driving results1
What is Driving Results?
  • Different results “affected” vs. “non-affected”
    • Compare bidder MSE pre- to post-merger
      • Significant improvement in 2/4 deals for all stocks
      • No improvement in any deals for affected stocks

FDIC Conference on M&A of Financial Institutions

what is driving results2
What is Driving Results?
  • Firm-level
    • Can we draw conclusions based on 2/4 or 0/4?
      • Multivariate results also mixed
        • Affected vs. both stay vs. both cover
    • Sample sizes limiting – information pooling
      • Only 7% of cases both analysts stay
      • 24/2,251 cases where both stay/cover same stock (1%)
        • Yet estimate (stder) unusually large in merger C (4 out of 744)
    • Is this information pooling?

FDIC Conference on M&A of Financial Institutions

what is driving results3
What is Driving Results?
  • Impact of non-merging brokerage firms
    • Control for fact accuracy could be changing for all brokerage firms (unrelated to merger)
      • Binary variable if involved in merger plus binary variable if both analysts (target and bidder) stay after the merger
        • Both are set to zero for non-merging firms (footnote 14)
      • Include merge, bothstay, and merge*bothstay
        • Appears merge*bothstay is co-linear to bothstay & merge
    • Perhaps look at more/other deals and other variables that contribute to accuracy and analyst quality?

FDIC Conference on M&A of Financial Institutions

sample of brokerage mergers
Sample of Brokerage Mergers
  • Examine SDC
    • Pull all targets with SIC code of
      • 621: Security Brokers, Dealers, And Flotation
      • 622: Commodity Contracts Brokers And Dealers
      • 623: Security And Commodity Exchanges
    • Not 6311 (as noted in paper) - life insurance firms
    • 2,911 potential deals

FDIC Conference on M&A of Financial Institutions

acquisitions of u s brokerage firms
Acquisitions of U.S. Brokerage Firms
  • All deals announced from 1980 – 2005; exclude:
    • Acquisitions of certain assets (29), remaining interests (156), or majority interest (496) +
    • Acquisition of assets (1,388)
      • 532 involve acquisition of 100% of U.S. entity
        • PW – KP deal: 100% acquisition of assets
        • DLJ majority owned by AXA (insurance firm)
    • No foreign targets (must be in 50 U.S. states or DC)

 289 mergers/acquisitions + 532 acquisition of assets

FDIC Conference on M&A of Financial Institutions

summary statistics of 289 deals
Summary Statistics of 289 Deals
  • 37% of deals between 2 brokerage firms
  • 56 of targets are public, 49 subs of another firm
  • 176 of bidders are public, 47 are not in U.S.
  • At least five other deals of similar size
    • Shearson-EF Hutton; CS-First Boston; Alex Brown-Bankers Trust; Salomon-Citi; JP Morgan-Chase…
  • 20+ deals if include acquisition of assets
    • Robertson Stephens-BofA, Oppenheimer-CIBC, Herzog-Merrill; Greenwich-NatWest, Spears-Goldman…

FDIC Conference on M&A of Financial Institutions

other factors
Other Factors
  • Future areas of study?
    • Compare deals by broker vs. non-broker firms
      • Any improvements for non-brokerage bidders?
    • Examine stocks with highest variation
      • Do brokerages have IB relation for these firms?
    • Examine mergers post 2000 (Reg FD)
      • Is information sharing different afterwards
    • What is impact of analyst recommendations?
      • Could information pooling exist here as well?

FDIC Conference on M&A of Financial Institutions

in summary
In Summary
  • Overall, interesting paper
    • Attempts to address the issue of information sharing
  • Results suggest information pooling occurs
    • May be suspicious: small samples, issues with regressions
      • Disagreement between univariate and multiple regression approach
  • Frame paper as merged brokerage firms retain better employees  increased analyst accuracy post-merger
    • Many additional questions can be asked as well

FDIC Conference on M&A of Financial Institutions