Pawel Bilinski

Managers’ Private Information, Investor Underreaction and Long‐Run SEO Performance

For a sample of 2,879 SEOs by US stocks from 1970 to 2004, this paper decomposes an average three-year post-issue buy-and-hold abnormal return of −25.9% (relative to size- and B/M-matched non-issuing stocks) into two components. One component, representing 41% of the total, is due to lower risk exposure. The second component, representing the remaining 59%, is abnormal performance related to the surprise element of the issue decision, which the paper attributes to managers’ private information that the market does not incorporate into the announcement return. This second component results in abnormal returns during the 16 months after the offering.

Strategic distortions in analyst forecasts in the presence of short-term institutional investors

We document that analysts cater to short-term investors by issuing optimistic target prices. Catering dominates among analysts at brokers without an investment banking arm as they face lower reputational cost. The market does not see through the analyst catering activity and their forecasts lead to temporary stock overpricing that short-term institutional investors exploit to offload their holdings to retail traders. We also report evidence consistent with catering brokers being rewarded with more future trades channelled through them. Our study identifies a new source of conflicts of interest in analyst research originating from the ownership composition of a stock.

The Signaling Effect of Durations between Equity and Debt Issues

This study examines whether durations between equity and debt offerings allow investors to identify firms that are more likely to time issues of overvalued securities. We show that firms with higher stock overpricing are more likely to quickly issue both seasoned equity and debt following the previous capital acquisition. Investors understand issuers’ incentives to quickly return to the capital market and react less favorably to equity and debt issues that follow shortly after the previous offering. Together, the results show that durations between equity and debt issues provide valuable signals to investors on whether the issuer is likely to be timing the market.

How Accounting Firms Compete for Financial Advisory Roles in the M&A Market

Accounting firms are best known for audit services, however, their capital market influence goes far beyond their auditor role. This paper provides evidence on the competitive strength and service quality of accounting firms in the M&A advisory market. The competitive strength relates to the accounting expertise acquired through the audit work, such as better understanding of accruals and industry specialist status, which aid in estimating merger synergy gains. This knowledge spillover translates into high service quality offered by accounting firms exhibited in terms of higher acquirer announcement-period stock returns, lower likelihood of overpaying for the target, and better post-deal performance compared to transactions advised by investment banks. Bidders recognize value offered by accounting firms and reward them with more repeat business, which helps explain why Thomson Reuters ranks accounting firms among top global advisors, particularly in the mid- and low-end of the M&A market. Our study highlights the active role of accounting firms in the M&A advisory market that builds on knowledge spillover from audit to non-audit services.

Analyst Dividend Forecasts and Their Usefulness to Investors: International Evidence

Recent finance and accounting studies indicate that dividends are ‘sticky’ and declining in economic importance. If so, there should be little investor demand for analyst dividend estimates and analyst dividend forecasts should simply mirror time-series estimates. We examine firms from 16 countries spanning 2000-2013 and find that only 25% of firms exhibit sticky dividends, while the majority either increase (54%) or decrease (21%) their annual dividends. In contrast to the disappearing dividends view, we predict that this high variability in dividend payments across stocks actually increases investor demand for dividend information. Accordingly, analysts respond to this demand by producing informative dividend forecasts. Our analysis indicates that analysts’ dividend estimates are indeed useful to investors because they (i) are more accurate and better aligned with market dividend expectations than other estimates, such as standard time-series modelling approaches, (ii) convey incremental information to the market beyond that contained in other fundamentals, and (iii) help investors interpret the persistence of earnings news.

The Effect Firm Reporting Quality Has on the Issuance and Properties of Disaggregated Earnings Forecasts

This study documents that analysts are more likely to issue revenue forecasts to complement earnings-per-share estimates (EPS) when the quality of firm financial reporting is low. This is because compared to EPS forecasts accuracy, revenue forecast accuracy is less adversely affected by poor reporting quality, and as a result, investors rely more on revenue than EPS estimates in their investment decisions when the reporting quality is low. The result is robust to using five proxies for the quality of firm financial reporting: the variation in discretionary accruals, the absolute level of discretionary accruals, earnings persistence, absolute total accruals, and earnings volatility. Further, we document that better earnings forecasters are more likely to issue revenue estimates. This is because only better quality analysts would want their forecasts to be subject to higher market scrutiny, and because a combination of accurate revenue and EPS forecasts is a stronger signal of the analyst forecasting skill compared to an accurate stand-alone EPS estimate only.

Strategic Disclosure, Analyst Behavior and Equity Flotation Costs

We document that the quality of public and private information available to investors improves before seasoned equity offerings (SEO) but deteriorates shortly thereafter. As firms improve their financial communication, analyst earnings forecasts become more accurate and less biased. However, forecast optimism increases after the offering. Firms that enhance the quality of their public information before SEOs increase the likelihood of the offering being a success and reduce the costs of raising finance: underwriters are more likely to exercise their overallotment option, which increases the issue proceeds beyond the prospectus amount, and the underwriting fee decreases. Changes in private information quality induce higher information asymmetry between informed and uninformed investors, increasing flotation costs. The results are robust to controlling for endogeneity in the offering size and underwriter quality. Our findings are consistent with firms strategically improving their information disclosure around seasoned equity issues.