Mike Stegemoller’s research while affiliated with Baylor University and other places

We examine the impact of the Global Settlement on affiliation bias in analyst recommendations. Using a broad measure of investment bank-firm relationships, we find a substantial reduction in analyst affiliation bias following the settlement for sanctioned banks. In contrast, we find strong evidence of bias both before and after the settlement for affiliated analysts at non-sanctioned banks. Our results suggest that the settlement led to an increase in the expected costs of issuing biased coverage at sanctioned banks, while concurrent self-regulatory organization rule changes were largely ineffective at reducing the influence of investment banking on analyst research at large non-sanctioned banks.

We examine relationships between firms and their investment banks (IBs), both within and across different IB functions. For all transaction types, we find an increase in the number of relationships and a decrease in relationship exclusivity over time. We identify significant transaction-type specific relationship components, with relationships being strongest for equity and weakest for M&A. Relationships are less exclusive for firms with more bargaining power and more exclusive for younger, smaller firms, and firms with more growth options. Most importantly, we find strong evidence of a firm-wide relationship component that spans the functional areas of I-banking and increases over time.

We examine the IPOs of and acquisitions made by all-cash firms. This unique sample of firms provides a perspective unencumbered by much of the confounding information typically surrounding these corporate events. We find IPO gross spreads of 7% -- similar to the spreads in more complex IPO firms, and thus consistent with illogically sticky spreads. We find acquirer announcement returns roughly triple that of typical acquisitions. Since these returns reflect primarily the valuation split between acquirer and target, they suggest that some reduction in value of typical acquisitions stems from overestimating synergies or the revelation of new information regarding the bidder.

IntroductionTakeovers: Mergers and AcquisitionsSubsidiary Sales, Spin-Offs, Equity Carve-Outs, and Targeted StockSummary and Conclusions Discussion QuestionsAbout the Author

This Article tells the story of a new type of business — the special purpose acquisition corporation (SPAC). The promoters of a SPAC begin by forming a shell corporation with no assets. They then take the company public on little more than a promise that they will strive to complete the acquisition of a target in the near future. We present the first empirical study of the SPAC contract design, and use a hand-collected dataset to trace its evolution over the past nine years.While SPACs are a new form, their contract design borrows heavily from private equity's playbook. Private equity managers famously (and sometimes controversially) receive 20% of their funds' profits, and funds typically last only ten years. From the traditional 20% incentive compensation to a short investment shelf life, SPAC entrepreneurs tried to transfer many hallmarks of the private equity contract to the public market. Reputational constraints got lost in translation. The private equity fund model is built on repeat business, and reputation is a crucial contractual gap filler. In contrast, SPACs are one-shot deals. Without managerial reputation to rely on, investors demanded increasing amounts of "skin in the game" from SPAC managers, and placed more conditions on managerial claims to 20% of the profits. On the other hand, without the force of reputation constraining investors, a supermajority vote created a powerful holdout right, which shareholders used to exploit SPACs until the form evolved to eliminate it. Our study of SPACs — by demonstrating the ways in which parties contract for credibility in the absence of long-term relationships between investors and managers—thus underscores the importance of reputation to the relational dynamics in traditional private equity.Aside from making private equity publicly tradable (with its concomitant loss of reputation as gap filler), SPACs' chief innovations were in the classic governance mechanisms of voice and exit. SPACs evolved from granting investors a supermajority vote to eliminating the vote altogether. At the same time, they granted investors an even stronger walk-away right. Thus, the SPAC story, new as it is, casts light on an old governance question: the relative value of voice and exit.

We explore the central role that top venture capitalists play in the IPO underwriting market. We argue that underwriters curry favor with Top VCs, not necessarily issuing firms, because Top VCs have the ability to direct the most business in a repeated game sense to banks that treat them well. The relationship between VC firms and investment banks extends through time and therefore incentives extend beyond the current IPO. Consistent with this view, we find that Top VC-backed IPOs are more likely to get all-star coverage regardless of analyst bank affiliation. In turn, banks providing all-star coverage are more likely to be chosen to lead the next VC-backed deal. We find a positive relationship between underpricing and all-star coverage for Top VCs, but not non-Top VCs. Top VCs tolerate higher levels of underpricing because the information momentum generated by underpricing allows them to cash out at higher prices when the lockup expires. seminar participants at the 2011 Kaufmann Entrepreneurial Finance and Innovation Conference at Harvard, the 2011 Boston Area Finance Symposium, Alabama, Louisiana Tech, South Carolina, and Texas Tech universities for useful comments and suggestions. This paper was previously circulated under the title, "Do co-managing all-star analysts influence IPO pricing?" We are responsible for any errors.

Firms with high agency costs of overinvestment have significantly more positive dividend initiation announcement returns than other firms do. This paper presents the results from three experiments consistent with this conclusion: (i) dividend initiation announcement returns are significantly more positive for firms with low Tobin's Q and high cash flow; (ii) following an exogenous event (the dividend tax cut of 2003) which changed the equilibrium tradeoff between hoarding cash and paying it out, firms with weak governance (i.e. those that are more likely to overinvest) have significantly more positive initiation announcement returns; and (iii) firms with low Q significantly reduce their cash hoarding in the years following dividend initiations. Combined, these results are consistent with the hypothesis that initiating dividends reduces the agency costs of free cash flow and that the market reaction to dividend initiation announcements rationally anticipates the lower agency costs of free cash flow or overinvestment.

Private equity confronts a simple problem: convincing investors to fork over money to invest in a fund proposing to acquire interests in as-yet-unknown targets. There has been important empirical research on the private equity contract between investor and fund, but access to reliable data is difficult; the investment vehicles are generally privately held and there is no way to accurately track how the governing contracts may be evolving either in individual firms or across an industry. In the last several years, promoters have been using a new form of private equity investment vehicle, the special purpose acquisition company (SPAC). The promoters, or sponsors, incorporate a “blank check” company, a shell company with no assets or operating history. The company goes public on little more than the sponsors’ promise that they will shortly complete an acquisition of a target (generally but not always private), using various bonding mechanisms to assure investors that their money will not be misapplied. Because SPAC are publicly held, we have been able to gather data on the investment contract details and on changes in contractual strategies not previously available in the secretive world of venture capital and buyout funds.Our strategy is three-fold. First, we situate SPACs within the traditional private equity world, finding sufficiently similarity to suggest that we might draw general conclusions from the data. Second, we demonstrate how the data from SPACs aids in understanding another important transaction cost: the cost of co-ownership, which we term co-principal cost. We use the SPAC form to trace several aspects of this cost: voice, staged commitment of capital, and temporal conflict. Third, we use the SPAC dataset to document the evolution of strategies to contain co-principal costs. The SPAC form thus offers insights into how differences in organizational form affect the contractual relationship between investor and manager.