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Comments on Does Syndicate Pressure Affect
Analysts Incentive to Produce Information?
Evidence from Recommended Firms Securities Class
Action LawsuitsAuthors Connie Mao, Temple
University and Wei-Ling Song, Louisiana State
University

• Discussant Alex P. Tang, Ph.D. and CFA
• Morgan State University
• Baltimore, MD 21251

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What does the paper do?

• The authors use a sample of firms sued for
  financial reporting fraud by their investors to
  examine the validity of Syndicate Pressure
  Hypothesis (SPH) and Information Sharing
  Hypothesis (ISH).

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What are the issues examined?

• How do brokers work with and affect each other
  (networking or not)?
• What are the consequences of their behaviors?
• These are important questions but empirical
  evidence is scare.

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Data Set

• Sued firms obtained from the website of Stanford
  Securities Class Action Clearinghouse
• The authors create a sample of non-sued matching
  firms.
• The I/B/E/S database of stock recommendations,
  which provides analyst and brokerage firm
  information
• COMPUSTAT, CRSP and others

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Methodology

• They first split analysts into affiliated and
  unaffiliated analysts.
• They further split the affiliated analysts into
  analysts employed by lead-manager main (Type1)
  and co-manager main (Type2) brokers.

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Methodology continues

• Also, they split the unaffiliated analysts into
  analysts employed by co-lead syndicate banks
  (Type3), co-manager syndicate banks (Type4), and
  independent brokers (Type5).
• They investigate how prompt different types of
  analysts issue downgrades for the sued firms
  during the class action lawsuit period.

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To Be Networking

• Social reciprocity entices syndicate members in
  securities underwriting to act cooperatively in
  order to maintain their member status and
  relation with the Types 1 2 banks .
• The desire to be included in an underwriting
  syndicate network organized by the main bank in
  the future can cloud the incentive of Type 4
  banks to produce information.
• Types 1, 2 and 4 banks face syndicate pressure.

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Not To Be Networking

• Type 3 banks can organize syndicates themselves,
  and they dont need to rely upon the networking
  relations with the main banks.
• Type 5 banks are basically on their own. They
  dont need to curry favor from other banks.
• They are not bound by syndicate pressures.

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Main Findings

• There is no significant difference in the number
  of days taken to issue downgrades between
  analysts employed by Types 1 2 banks.
• Analysts employed by Type 4 banks, which do not
  have direct underwriting relationships with the
  recommended firms but rely on affiliated main
  banks to be in other deals, issue downgrades as
  late as those employed by Types 1 2 Banks.

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Main Findings continues

• Analysts employed by Types 3 5 banks, issue
  downgrades promptly.
• Global Settlement and the associated Rule 2711
  appear to improve analysts independence,
  particularly among Types 1, 2 and 4 banks.

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Comment Sample

• we identify 706 unique firms (associated with
  748 lawsuits) that have main banks, i.e.,
  securities issuance activities, within three
  years prior to the class period starting dates.
• It is not clear to me the sample is about the
  sued firms or the brokers.

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Comment Sample

• What are the characteristics of each of the 5
  different types of banks?
• Are the results driven by their characteristics?
• For example, if Type 4 banks are smaller, they
  tend to be followers in downgrade. It is
  naturally they will be late in the game and it
  has nothing to do with pressures or not.

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Comment Hypotheses

• In concluding the SP and IS hypotheses, the
  authors try to compare the promptness in issuing
  downgrades between unaffiliated syndicate banks
  (Types 34) and Type 5 banks.
• It is not clear to me if Types 1 and 2 banks are
  part of the hypotheses development or not.
• They should be included in the hypotheses part.

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Comment Hypotheses

• To me, the most interesting finding of their
  study is that Types 3 4 behave differently
  although they are both syndicate banks. Is this
  an after-thought or is this something the authors
  want to look into right from the beginning?
• I suggest that the authors should hypothesize the
  comparison between Types 3 4 banks in the
  hypotheses development section.

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Comment Results

• In Table 8, second regression, the coefficient of
  the indicator variable for Type 5 banks is no
  longer significant in the post-Rule 2711 period.
  I will assume that even in the post-Rule 2711
  period, Type 5 banks will still be prompt in
  downgrade.
• Some explanations could be helpful.

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Comment Results

• In the same table, Regressions 3 and 4 The
  coefficient estimates on interaction terms
  between post-Rule 2711 and Type 5 bank dummy is
  significantly positive. This is a bit confusing
  to me. Does this mean that Type 5 banks become
  significantly sluggish in issuing downgrades in
  the post-Rule 2711 period?

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Comment Results

• Table 10 the authors state that We find no
  significant difference in stock market reactions
  to downgrades offered by different bank types.
• Should we expect that the Type 5 banks downgrade
  announcements should carry more weight since they
  are more independent than other types of banks?

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Comment Length of the Paper

• Could the Tables 6 8 be combined? It appears to
  me they are a bit overlapping with each other.
• In the same vein, the authors should try to
  shorten the paper somewhat.
• On the other hand, the conclusion section is too
  sketchy. It doesnt say anything about the
  informativeness of the downgrade announcements.

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Comment Figure 3

• To provide a comparison of the banks promptness
  in issuing downgrades between pre- and post-Rule
  2711 periods, the authors should try to graph the
  figure in two time periods.

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Comment Relation to Interlocking Literature

• Prior studies document a similarity in behavior
  between interlocking firms.
• Interlocking literature has noted that a firm is
  more likely to adopt certain practices such as
  poison pills and engage in option backdating if
  its interlocked firm has already adopted such a
  practice.
• Are the findings in this paper consistent with
  interlocking literature?
• The authors might be able to enrich the paper by
  relating to interlocking literature.

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A Philosophical Question

• The papers evidence is consistent with the
  implications of SP Hypothesis.
• But shouldnt we expect that Type 3 banks have
  even stronger incentive to maintain good relation
  with Type 1 banks?
• It is much more lucrative to be in the group of
  leading underwriters. They want to be in the
  network of leading underwriters in the future.
• If this argument is true, they will be slow to
  issue downgrades also.

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Conclusion

• The paper is well written and carefully done. I
  can see that tremendous amount of time has been
  spent. I understand that the paper has gone
  through substantial revisions from earlier
  versions.