Rahul Vashishtha

The Role of Bank Monitoring in Borrowers’ Discretionary Disclosure: Evidence from Covenant Violations

This study uses covenant violations to provide evidence on how firms make disclosure decisions in the presence of enhanced bank monitoring. Using a regression discontinuity design, I find that firms reduce disclosure following covenant violations. A series of analyses suggest that part of this decline in disclosure reflects a delegation of monitoring to banks by shareholders who consequently demand less disclosure.

The Effects of Bank Mergers on Corporate Information Disclosure

Applying a difference-in-differences approach to explore variations in the timing of bank mergers in the U.S. over the last two decades, we document an increase in borrowers’ disclosure when their banks engage in mergers and acquisitions. The effect is stronger among borrowers more reliant on services from the merging banks and when mergers cause larger changes in banks’ monitoring and financing of borrowers. These findings suggest an information spillover effect from bank mergers to the public financial markets, and have implications for how changes in banking markets affect the availability of public disclosure in the stock markets.

Analyst Recommendations, Traders’ Beliefs, and Rational Speculation

Theoretical models suggest that traders’ higher order beliefs – beliefs about other traders’ beliefs about assets’ future payoffs – can lead to speculative trading that can explain price anomalies such as bubbles, drift, and momentum. We propose concentration in analyst stock price recommendations as an observable proxy for higher order beliefs and document an association between recommendation concentration and two price anomalies: the technology bubble in 1999/2000 and post-news price drift for a broad sample over the period 1994-2009. The relations are consistent with a role for higher order beliefs in price formation. In addition, identification of recommendation concentration as a source of beliefs is an innovation, given that the theoretical models provide little guidance on observable sources of higher order beliefs.

Analyst Recommendations and Stock Price Bubbles

Models predict that traders will engage in rational speculative trading when they collectively believe that a firm’s stock price in the next period will exceed the current stock price regardless of their beliefs about its intrinsic value, resulting in mispricing. We examine whether analyst recommendations are associated with mispricing due to rational speculative trading. We find a strong positive relation between the concentration in analyst recommendations and bubble continuation in two alternative settings. In the technology bubble in 2000 we find a positive association between bubble continuation and concentration in a tech firm’s analyst buy recommendations. In an out-of-sample analysis for firms in multiple industries from 1994-2009 we show that analyst buy recommendation concentration predicts future return patterns that exhibit characteristics of a rational speculative bubble. Our findings suggest that analysts output could be associated with the perpetuation instead of correction of this mispricing.

Bank Transparency and Deposit Flows

Many theories link depositors’ behavior to the transparency of banks. Yet, very little is known about this relationship empirically. Analyzing US commercial banks from 1994-2013, we document that uninsured deposit flows are more sensitive to information about bank performance when the quality of the information provided by the bank is higher. We also provide evidence linking this information quality to deposit rates, banks’ investments, and profitability. Our findings provide support for the view that bank transparency is a double-edged sword: While more information facilitates monitoring by depositors, it also adversely affects banks’ unique role in creating stable liquid assets for depositors.

Analyst Recommendations and Rational Speculation

Models predict that traders will engage in rational speculative trading when they collectively believe that a firm’s stock price in the next period will exceed the current stock price regardless of their beliefs about its intrinsic value, resulting in mispricing. We examine whether analyst recommendations are associated with mispricing due to rational speculative trading. We find a strong positive relation between the concentration in analyst recommendations and bubble continuation in two alternative settings. In the technology bubble in 2000 we find a positive association between bubble continuation and concentration in a tech firm’s analyst buy recommendations. In an out-of-sample analysis for firms in multiple industries from 1994-2009 we show that analyst buy recommendation concentration predicts future return patterns that exhibit characteristics of a rational speculative bubble. Our findings suggest that analysts output could be associated with the perpetuation instead of correction of this mispricing.

Equity Market Liberalization and Cost of Capital: Evidence from an Implied Cost of Capital Approach

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm’s shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.

Public Information, Traders’ Beliefs, and Rational Speculation

Models predict that traders will engage in rational speculative trading when they collectively believe that a firm’s stock price in the next period will exceed the current stock price regardless of their beliefs about its intrinsic value, resulting in mispricing. We examine whether analyst recommendations are associated with mispricing due to rational speculative trading. We find a strong positive relation between the concentration in analyst recommendations and bubble continuation in two alternative settings. In the technology bubble in 2000 we find a positive association between bubble continuation and concentration in a tech firm’s analyst buy recommendations. In an out-of-sample analysis for firms in multiple industries from 1994-2009 we show that analyst buy recommendation concentration predicts future return patterns that exhibit characteristics of a rational speculative bubble. Our findings suggest that analysts output could be associated with the perpetuation instead of correction of this mispricing.