# Presentation: 738459

## Detecting Information Pooling:  Evidence from Earnings Forecasts after Brokerage Mergers

- by Serena Ng & Matthew Shum
**Discussed by David Becher**
- FDIC Conference on Mergers and Acquisitions of Financial Institutions

## Research Question and Motivation

- Do forecasts improve after brokerage mergers?
- Pooling of information and information resources may improve forecast accuracy
- Examine stocks where target & bidder analysts retained
- Compare to those deals where only one analyst retained
- No information pooling exists
- Plus distinguish info. pooling from analyst selection
- Does analyst selection improve forecast estimates?

- FDIC Conference on M&A of Financial Institutions

- November 2007

## Contribution of Paper

- Main Takeaway
- Interesting paper, asks important and unique questions in the literature
- Clear others think this is a good paper...
- Matthew Shum’s Vita
- Detecting Information Pooling: Analysts' Forecasts After Brokerage Firm Mergers (with Serena Ng)
**Accepted**, *Advances in Economic Analysis and Policy*

- FDIC Conference on M&A of Financial Institutions

- November 2007

## What is Driving Results?

- Authors examine four brokerage mergers
- 1994 to 2000 - market conditions very different
- In all deals, majority of analyst from bidder (70% – 90%)
- Inconsistency in firm selection
- Two deals involve foreign bidders (Switzerland)
- Plus, one firm appears as both bidder and target
- Inconsistency in the merger form
- One deal involves acquisition of assets (subsidiary)
- Second deal, target is majority owned by another firm
- Action of analysts may not be independent

- FDIC Conference on M&A of Financial Institutions

- November 2007

## What is Driving Results?

- Different results “affected” vs. “non-affected”
- Compare bidder MSE pre- to post-merger
- Significant improvement in 2/4 deals for all stocks
- No improvement in any deals for affected stocks

|  | ALL STOCKS |  |  |  | AFFECTED |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Merger | Pre-MSE | Post-MSE | Post vs Pre |  | Pre-MSE | Post-MSE | Post vs Pre |
| A | 3.93 | 4.11 | - |  | 0.89 | 1.29 | - |
| B | 5.03 | 4.81 | - |  | 0.79 | 3.25 | *** |
| C | 6.86 | 3.69 | *** |  | 1.51 | 1.76 | - |
| D | 5.91 | 3.92 | ** |  | 1.04 | 1.78 | - |

- FDIC Conference on M&A of Financial Institutions

- November 2007

## What is Driving Results?

- Firm-level
- Can we draw conclusions based on 2/4 or 0/4?
- Multivariate results also mixed
- Affected vs. both stay vs. both cover
- Sample sizes limiting – information pooling
- Only 7% of cases both analysts stay
- 24/2,251 cases where both stay/cover same stock (1%)
- Yet estimate (stder) unusually large in merger C (4 out of 744)
- Is this information pooling?

- FDIC Conference on M&A of Financial Institutions

- November 2007

## What is Driving Results?

- Impact of non-merging brokerage firms
- Control for fact accuracy could be changing for all brokerage firms (unrelated to merger)
- Binary variable if involved in merger plus binary variable if both analysts (target and bidder) stay after the merger
- Both are set to zero for non-merging firms (footnote 14)
- Include merge, bothstay, and merge*bothstay
- Appears merge*bothstay is co-linear to bothstay & merge
- Perhaps look at more/other deals and other variables that contribute to accuracy and analyst quality?

- FDIC Conference on M&A of Financial Institutions

- November 2007

## Sample of Brokerage Mergers

- Examine SDC
- Pull all targets with SIC code of
- 621: Security Brokers, Dealers, And Flotation
- 622: Commodity Contracts Brokers And Dealers
- 623: Security And Commodity Exchanges
- Not 6311 (as noted in paper) - life insurance firms
- 2,911 potential deals

- FDIC Conference on M&A of Financial Institutions

- November 2007

## Acquisitions of U.S. Brokerage Firms

- All deals announced from 1980 – 2005; exclude:
- Acquisitions of certain assets (29), remaining interests (156), or majority interest (496) +
- Acquisition of assets (1,388)
- 532 involve acquisition of 100% of U.S. entity
- PW – KP deal: 100% acquisition of assets
- DLJ majority owned by AXA (insurance firm)
- No foreign targets (must be in 50 U.S. states or DC)
- 	 289 mergers/acquisitions + 532 acquisition of assets

- FDIC Conference on M&A of Financial Institutions

- November 2007

## Summary Statistics of 289 Deals

- 37% of deals between 2 brokerage firms
- 56 of targets are public, 49 subs of another firm
- 176 of bidders are public, 47 are not in U.S.
- At least five other deals of similar size
- Shearson-EF Hutton; CS-First Boston; Alex Brown-Bankers Trust; Salomon-Citi; JP Morgan-Chase...
- 20+ deals if include acquisition of assets
- Robertson Stephens-BofA, Oppenheimer-CIBC, Herzog-Merrill; Greenwich-NatWest, Spears-Goldman...

- FDIC Conference on M&A of Financial Institutions

- November 2007

## Other Factors

- Future areas of study?
- Compare deals by broker vs. non-broker firms
- Any improvements for non-brokerage bidders?
- Examine stocks with highest variation
- Do brokerages have IB relation for these firms?
- Examine mergers post 2000 (Reg FD)
- Is information sharing different afterwards
- What is impact of analyst *recommendations*?
- Could information pooling exist here as well?

- FDIC Conference on M&A of Financial Institutions

- November 2007

## In Summary

- Overall, interesting paper
- Attempts to address the issue of information sharing
- Results suggest information pooling occurs
- May be suspicious: small samples, issues with regressions
- Disagreement between univariate and multiple regression approach
- Frame paper as merged brokerage firms retain better employees  increased analyst accuracy post-merger
- Many additional questions can be asked as well

- FDIC Conference on M&A of Financial Institutions

- November 2007