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I used to work at Goldman Sachs! How firms benefit from organizational status in the market for human capital
How does employer status benefit firms in the market for general human capital? On the one hand, high status employers are better able to attract workers, who value the signal of ability that employment at those firms provides. On the other hand, that same signal can help workers bid up wages and capture the value of employers' status. Exploring this tension, we argue that high status firms are able to hire higher ability workers than other firms, and do not need to pay them the full value of their ability early in the career, but must raise wages more rapidly than other firms as those workers accrue experience. We test our arguments using unique survey data on careers in investment banking.
Journal Article
What Drives Sell-Side Analyst Compensation at High-Status Investment Banks?
We use proprietary data from a major investment bank to investigate factors associated with analysts' annual compensation. We find compensation to be positively related to \"All-Star\" recognition, investment-banking contributions, the size of analysts' portfolios, and whether an analyst is identified as a top stock picker by the Wall Street Journal. We find no evidence that compensation is related to earnings forecast accuracy. But consistent with prior studies, we find analyst turnover to be related to forecast accuracy, suggesting that analyst forecasting incentives are primarily termination based. Additional analyses indicate that \"All-Star\" recognition proxies for buy-side client votes on analyst research quality used to allocate commissions across banks and analysts. Taken as a whole, our evidence is consistent with analyst compensation being designed to reward actions that increase brokerage and investment-banking revenues. To assess the generality of our findings, we test the same relations using compensation data from a second high-status bank and obtain similar results.
Journal Article
When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As
We provide new evidence on the role of financial advisors in M&As. Contrary to prior studies, top-tier advisors deliver higher bidder returns than their non-top-tier counterparts but in public acquisitions only, where the advisor reputational exposure and required skills set are relatively larger. This translates into a $65.83 million shareholder gain for an average bidder. The improvement comes from top-tier advisors' ability to identify more synergistic combinations and to get a larger share of synergies to accrue to bidders. Consistent with the premium price-premium quality equilibrium, top-tier advisors charge premium fees in these transactions.
Journal Article
Do Security Analysts Speak in Two Tongues?
Why do security analysts issue overly positive recommendations? We propose a novel approach to distinguish strategic motives (e.g., generating small-investor purchases and pleasing management) from nonstrategic motives (genuine overoptimism). We argue that nonstrategic distorters tend to issue both positive recommendations and optimistic forecasts, while strategic distorters \"speak in two tongues,\" issuing overly positive recommendations but less optimistic forecasts. We show that the incidence of strategic distortion is large and systematically related to proxies for incentive misalignment. Our \"two-tongues metric\" reveals strategic distortion beyond those indicators and provides a new tool for detecting incentives to distort that are hard to identify otherwise.
Journal Article
Do Investment Banks Matter for M&A Returns?
We document a significant investment bank fixed effect in the announcement returns of M&A deals. The interquartile range of bank fixed effects is 1.26%, compared with a full-sample average return of 0.72%. The results remain significant after controlling for the component of returns attributable to the acquirer. Our findings suggest that investment banks matter for M&A outcomes, and contrast earlier studies that show no positive link between various measures of advisor quality and M&A returns. Differences in average returns across banks are also persistent over time and predictable from prior performance. Clients do not chase past returns, which may explain why persistence exists in M&A performance while it is absent in mutual funds.
Journal Article