Qing Hao

The Performance of Investment Bank-Affiliated Mutual Funds: Conflicts of Interest or Informational Advantage?

Using a comprehensive sample of U.S. mutual funds from 1992 to 2004, we find strong evidence that investment bank-affiliated funds underperform unaffiliated funds. Consistent with the conflict of interest hypothesis, we find that affiliated funds hold disproportionately large amounts of stocks of their initial public offering and seasoned equity offering clients. Moreover, worse-performing clients are more likely to be held by affiliated funds. Our results are robust to alternative risk adjustments, portfolio weighting schemes, and regression methodologies. Overall, our findings are consistent with the idea that investment banks use affiliated funds to support underwriting business at the expense of fund shareholders.

Does Merger Structure Matter

Purpose - A friendly merger can be structured as a one-step transaction or a two-step transaction. For a variety of reasons, such as the fast speed with which two-step mergers are completed, there are concerns about whether target shareholders are disadvantaged by this structure in comparison with one-step mergers. The purpose of this paper is to examine the effects of the two types of merger structures from the shareholder point of view. Design/methodology/approach - In order to compare the shareholder wealth effects of merger structure, the authors control for deal and firm characteristics and the endogenous nature of the choice of transaction form. Specifically, the authors follow the literature to use a switching regression framework with endogenous switching to address endogeneity. Findings - No evidence was found of detrimental effects of two-step mergers on target shareholders. The findings suggest that at least some one-step mergers could benefit from using the two-step structure. The authors provide several explanations for the continued use of one-step mergers. Originality/value - Although there is some literature on freeze outs of minority shareholders, no one has examined two-step mergers in comparison with one-step mergers. The papers results will be valuable to corporate managers, M&A advisors, regulators, and policy makers.

The Bright Side of Discretionary Accruals: Evidence from Finance and Innovation

We find cross‐sectional evidence that a financially constrained firm with patentable innovation opportunities can use discretionary accruals to reveal information about the firms prospects and facilitate its financing activities. Specifically, using firms with patents in the National Bureau of Economic Research (NBER) patent database, we find that among financially constrained firms, higher discretionary accruals are associated with more capital being raised, greater research and development (R&D) expenditures, more patents, more patent citations, and better operating performance in the future. These positive relationships are driven by firms that raise equity capital, especially those that raise equity capital from employees.