with Andrew Metrick, The Wharton School

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ABSTRACT This paper analyzes the economics of the private equity industry using a novel model and dataset. We obtain data from a large investor in private equity funds, with detailed records on 238 funds raised between 1992 and 2006. Fund managers earn revenue from a variety of fees and profit-sharing rules. We build a model to estimate the expected revenue to managers as a function of these rules, and we test how this estimated revenue varies across the characteristics of our sample funds. Among our sample funds, about 60 percent of expected revenue comes from management fees, a fixed-revenue component that is not sensitive to performance. We find major differences between venture capital (VC) funds and buyout (BO) funds – the two main sectors of the private equity industry. In general, BO fund managers earn lower revenue per managed dollar than do managers of VC funds, but nevertheless these BO managers earn substantially higher revenue per partner and per professional than do VC managers. Furthermore, BO managers build on their prior experience by raising larger funds, which leads to significantly higher revenue per partner and per professional, despite the fact that these larger funds have lower revenue per dollar. Conversely, while prior experience by VC managers does lead to higher revenue per partner in later funds, it does not lead to higher revenue per professional. Taken together, these results suggest that the BO business is more scalable than the VC business.

With Massimo Massa and Lei Zhang, INSEAD

ABSTRACT We examine the effects of institutional investors’ credit supply uncertainty (CSU) on the capital structure of the firm using a novel dataset. We measure CSU as the investors’ investment horizon, based on the idea that the shorter the investment horizon of investors, the higher the issuer’s refinancing risk, i.e., the risk of not being able to roll over its maturing debt because of supply uncertainty. We find that high CSU leads to lower leverage and lower probability of issuing bonds in the next period, but to higher probability of issuing equity and borrowing from banks. The effects are concentrated in firms whose bond investor base is more prone to credit supply imbalances, as measured by investor geographical concentration, herding propensity, and local bond preference. These findings suggest that the financial fragility arising from supply-based factors significantly affects the firm’s capital structure.

with Lily H. Fang, INSEAD

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ABSTRACT We study the effect of reputation on the values of analysts’ stock recommendations. Using 1994-2003 U.S. data, we measure personal reputation using the Institutional Investor All-American awards and bank reputation using Carter-Manaster ranks and study the values of various analyst groups’ buy and sell recommendations. We find major differences between tech sector and non-tech sector analysts. In tech sector reputable analysts significantly outperform less reputable analysts both at the personal and institutional level using the Carhart 4-factor model. In contrast, reputable analysts in non-tech sector significantly outperform less reputable analysts only at the institutional level, and for sell recommendations only. These results are robust to controlling for technology index returns, and in fact are strengthened by it. We also document some evidence of conflicts of interest for non-AA analysts at top-tier banks who cover tech stocks. Taken together, these results suggest that analyst reputation matters more in tech sector and that tech-sector star analysts’ stock recommendations have significant investment values both because they are skilled and also because they are able to resist pressures from conflicts of interest better than their non-reputable counterparts.

with Lily H. Fang, INSEAD

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ABSTRACT Using 1983-2002 U.S. data, we examine whether the quality differentials in earnings forecasts between reputable and non-reputable analysts vary as the severity of conflicts of interest varies. We measure personal reputation using the Institutional Investor All-American (AA) awards, and bank reputation using Carter-Manaster ranks. While both personal reputation and bank reputation are associated with higher-quality forecasts overall, their effectiveness against conflicts of interest differs. The severity of conflicts (proxied by the aggregate volume of new equity issues) has a negative and significant effect on the performance of non-AAs at top-tier banks relative to both AAs at top-tier banks and non-AAs at lower-tier banks. In contrast, the severity of conflicts has a positive and significant effect on the performance of AAs at top-tier banks relative to both non-AAs at top-tier banks and AAs at lower-tier banks. These findings suggest that personal reputation is an effective disciplinary device against conflicts of interest, while bank reputation alone is not.

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ABSTRACT This paper examines the effects of bank relationships on underwriter choice in the Japanese corporate-bond market following the 1993 deregulation. Bank relationships have significant positive effects on a firm's underwriter choice. Relationship firms receive a small but significant fee discount and, consistent with mitigating effect of bank competition on holdup cost, multiple-relationship firms receive a significantly deeper discount than solo-relationship firms. Bank shareholding alone negatively affects underwriter choice, whereas shareholding together with loans have significantly more positive effects than loans alone. Finally, existing relationships reduce a Japanese firm's switching probability by 32%, in contrast to only 6% for U.S. firms.

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ABSTRACT This paper studies the effect of bank relationships on underwriter choice in the U.S. corporate-bond underwriting market following the 1989 commercial-bank entry. I find that bank relationships have positive and significant effects on a firm’s underwriter choice, over and above their effects on fees. This result is sharply stronger for junk- bond issuers and first-time issuers. I also find that there is a significant fee discount when there are relationships between firms and commercial banks. Finally, I find that serving as arranger of past loan transactions has the strongest effect on underwriter choice, whereas serving merely as participant has no effect.