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

November 2007 FDIC Conference on M&A of Financial Institutions

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?

November 2007 FDIC Conference on M&A of Financial Institutions

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

November 2007 FDIC Conference on M&A of Financial Institutions

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

November 2007 FDIC Conference on M&A of Financial Institutions

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

ALL STOCKS AFFECTED

Merger Pre-MSE Post-MSE Post vs Pre Pre-MSE Post-MSE Post vs Pre

A 3.93 4.11 - 0.89 1.29 -

B 5.03 4.81 - 0.79 3.25 ***

C 6.86 3.69 *** 1.51 1.76 -

D 5.91 3.92 ** 1.04 1.78 -

November 2007 FDIC Conference on M&A of Financial Institutions

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?

November 2007 FDIC Conference on M&A of Financial Institutions

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?

November 2007 FDIC Conference on M&A of Financial Institutions

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

November 2007 FDIC Conference on M&A of Financial Institutions

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

November 2007 FDIC Conference on M&A of Financial Institutions

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…

November 2007 FDIC Conference on M&A of Financial Institutions

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?

November 2007 FDIC Conference on M&A of Financial Institutions

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