Knowledge that Transforms

We investigate the effects of NASD Rule 2711 on analysts' conflict of interest in corporate financing activities. Specifically, we examine the relations (1) between analysts' guidance in earnings forecasts and recommendations and corporate external financing and (2) between external financing and future stock returns during the 1994–2010 period. We find a positive relation of analysts' guidance in earnings forecasts and recommendations (especially long-term growth forecast and recommendations) and corporate financing activities, but the relation is weaker in the post-Rule period than in the pre-Rule period. We also find a negative relation between corporate external financing and future stock returns, but the relation is weaker in the post-Rule period. Moreover, the changes of these relations after the implementation of the Rule are greater for firms with greater conflicts of interest. Our empirical results suggest that Rule 2711 has reduced the extent of analysts' conflicts of interest in corporate financing activities.

This paper finds evidence that the market for follow-on capital discourages risk taking by venture capital fund managers. The amount of follow-on capital raised by venture capitalists is concave with respect to current fund performance. In addition, managers with less consistent performance are slower, and less likely, to raise a follow-on fund. Venture capitalists adjust their investment strategy to balance fundraising incentives against the incentive to pursue risk provided by carried interest. The findings are consistent with models of career concerns, where an agent's compensation is designed to (partially) offset the implicit incentives created by future employment opportunities.

We use hand-collected data on a sample of German public firms during 2011-2014 to show that firms use currency derivatives more often when they export or import, and especially when exchange-rate fluctuations are larger, but to a lesser extent when having high export and import shares simultaneously. We interpret this finding as evidence of operational hedging that arises when foreign-denominated revenues and costs match, crowding out financial hedging. Our identification strategy uses both cross-sectional heterogeneity in exchange-rate exposures and time-series variation in exchange-rate fluctuations. The results highlight the importance of examining operating strategies as integral determinants of corporate financing policies.

Using hand-collected CEO education data of 3574 CEOs over the period of 2000 to 2015, we document that CEOs are significantly more likely to acquire targets that are headquartered in those states where the CEOs received their undergraduate and graduate degrees. Education-state deals are larger, have higher completion rates, and exist with both public and private targets. Acquirers pay a lower target premium for education-state deals and the cumulative abnormal announcement returns are positive. The combined evidence suggests that education-state acquisitions are more likely to be driven by bidder CEO's information advantage toward firms headquartered in the education state.