The Usual Suspects: A Primer on Investment Banks - PowerPoint PPT Presentation

1 / 44
About This Presentation
Title:

The Usual Suspects: A Primer on Investment Banks

Description:

The Usual Suspects: A Primer on Investment Banks Recommendations and Emerging Markets Javier Santiso Chief Economist and Deputy Director OECD Development Centre – PowerPoint PPT presentation

Number of Views:67
Avg rating:3.0/5.0
Slides: 45
Provided by: u087
Learn more at: https://www.oecd.org
Category:

less

Transcript and Presenter's Notes

Title: The Usual Suspects: A Primer on Investment Banks


1
The Usual SuspectsA Primer on Investment Banks
Recommendations and Emerging Markets
  • Javier Santiso
  • Chief Economist and Deputy Director
  • OECD Development Centre

Sebastián Nieto Parra Chaire Finances
Internationales Sciences Po Paris
Conference Opening and Innovation on Financial
Emerging Markets Beijing - China ? March 28 2007
http//www.financesinternationales.sciences-po.fr/
2
Objective of the paper
I
Overview of the literature
II
Description of the data
III
Investments banks business and research
publications
IV
Emerging markets capital flows and research
publications
V
Conclusions
VI
3
Two core questions
  • Do recommendations given by investment banks have
    an impact on the allocation of portfolio flows in
    the emerging markets?
  • That reveals the influence of analysts
    recommendations on investors behaviour.
  • Above all, do recommendations are related with
    the business of investment banks?
  • Information provided by banks to investors could
    be biased depending on their own objective that
    sometimes could differ from those of investors.

4
Objective of the paper
I
Overview of the literature
II
Description of the data
III
Investments banks business and research
publications
IV
Emerging markets capital flows and research
publications
V
Conclusions
VI
5
Investment banks recommendations
  • The impact of investments banks recommendations
    on capital markets has been concentrated in OECD
    countries.
  • Womack (1996), Jackson (2005), Boni and Womack
    (2002), Barber et al (2001), Asquith et al
    (2005),
  • Variety of results
  • analysts are confronted by a trade-off between
    sending true signals and optimistic signals.
  • Larger number of buy recommendations than sell
    recommendations.
  • Market reaction to upgrades is less pronounced
    than the market reaction to downgrades by
    analysts.
  • Impact of the measures introduced by the NYSE and
    NASDAQ, but also the sanctions established by the
    SEC in 2002.

6
Investment banks recommendations
  • Research literature on emerging markets is scarce
    and concentrated in the equity market
  • Seasholes (2000), Bae et al (2005) Accuracy of
    local vs foreign forecast analysis.
  • Bacmann and Bollinger (2001) Boom of the stocks
    covered by analysts between 1993 and 2000.
  • Empirical studies of the relationship between the
    recommendations and underwriters are scarce and
    concentrated to OECD countries
  • - Womack and Michaely (1999). Results suggest
    that there is a conflict of interest between
    investment banking and research department.

7
Capital Flows to Emerging Countries
  • A large body has studied the determinants of
    capital flows
  • Push factors or global factors literature
    First half of the 90s Fernandez-Arias (1996) and
    Calvo et al (1993)
  • Pull and Push factors Taylor and Sarno
    (1997), World Bank (2001), Alfaro et al (2005),
  • Most of the results conclude that local factors
    combined with external factors explain capital
    flows (FDI, foreign banks lending, bond and
    equity flows,).
  • In addition to pull and push factors, recent
    empirical literature has studied the impact of
    information and distance on capital flows
  • Ghosh and Wolf (1999), Savastano (2000),
    Papaioannou (2004) and Portes and Rey (2005).
  • In particular Portes and Rey (2005) develop an
    empirical model in which international
    information flows are a significant aspect to
    explain international equity flows.

8
Our research
  • By using untapped and rich dataset, the purpose
    of this study
  • First, it is an attempt to analyse the
    determinants of the recommendations given by
    investment banks in the sovereign emerging bond
    market.
  • Second, it allows to determine the impact of
    information on capital flows. For that we take
    into account investment banks recommendations as
    an additional factor to explain capital flows.

9
Objective of the paper
I
Overview of the literature
II
Description of the data
III
Investments banks business and research
publications
IV
Emerging markets capital flows and research
publications
V
Conclusions
VI
10
Investment banks recommendations
  • Construction of a unique database containing the
    recommendations given by the major investment
    banks to the Latin American bond markets.
  • Direct and strict link between financial
    intermediaries and investors (not public
    information).
  • First publication that studies the impact that
    investment banks recommendations may have on
    Latin American Capital Markets.
  • Period July 1997 - July 2006.
  • Frequency Monthly Reports

11
Investment banks recommendations
  • We have taken the recommendations given by 10
    investment banks. All of them important players
    in the emerging bond markets.

12
Investment banks recommendations
  • Main aspects concerning the recommendations given
    by investment banks
  • Composed only by sovereign emerging debt.
  • We have classified three types of
    recommendations Overweight (1), neutral (0) and
    underweight (-1).
  • These recommendations are assimilated to the
    cases of buying, maintaining and selling with
    respect to a portfolio (the index EMBI
    calculated by JP Morgan)
  • Given portfolio restrictions a buying
    recommendation must be compensated by a selling
    advice.

13
Investment banks recommendations
  • Example Average of the recommendations given to
    Brazil by the investment banks with respect to
    the weight of Brazil in the EMBI Global index.

14
Investment banks recommendations
  • We have taken 11 Latin American countries that
    represent nearly 95 of the GDP of the region.
    The total number of recommendations is over
    3,000.

15
Objective of the paper
I
Overview of the literature
II
Description of the data
III
Investments banks business and research
publications
IV
Emerging markets capital flows and research
publications
V
Conclusions
VI
16
Investment banks business
  • Banks are faced with a trade-off concerning
    recommendations
  • While sell side business could have the incentive
    to build reputation by giving accurate
    information in the long term .
  • . in the short term recommendations could be
    biased in order to obtain short term profits.
  • Additionally, investment banking activities could
    be motivated to recommend optimistically the
    assets which they are participating as
    underwriters in an IPO.

17
Underwriters recommendations
  • Recommendations given by banks that have been
    underwriters for Latin American sovereign bond
    issues.
  • - 90 of the underwriters recommend to investors
    at the announcement date of the issue to buy or
    to maintain in their portfolio the bonds issued
    by the countries where they are acting as
    underwriters.

18
Size of the market and recommendations
  • Objective of the sell side business to sell
    portfolios to a large variety of financial
    intermediaries. The percentage invested in these
    portfolios increases relative to the size of each
    country.
  • High correlation between recommendations and
    size of the market too big to underweight
  • Credit risk is not a relevant variable to
    determine the recommendations

19
Objective of the paper
I
Overview of the literature
II
Description of the data
III
Investments banks business and research
publications
IV
Emerging markets capital flows and research
publications
V
Conclusions
VI
20
Determinants of capital flows
  • In order to test the impact of recommendations on
    capital flows (Bond flows and Equity flows
    respectively), we have used the following two
    panel data regressions models
  • (i)
  • (ii)
  • where and percentage
    allocated by funds in country i with respect to
    the total amount invested in emerging economies.
  • the average of the investment banks
    recommendations given to country i .
  • Pull variables defined by capital
    markets (exchange rate, spread of sovereign bonds
    and rate of return of equity).

21
Determinants of capital flows
  • Pull variables that are strongly influenced
    by real sector (economic activity, inflation rate
    and interest rate).
  • country invariant variables which capture
    global factors (US nominal rates and US
    industrial production).
  • Period of the analyses 1997-2005 for equity
    flows
  • 2002-2006 for bond flows
  • Frequency Monthly
  • Countries Argentina, Brazil, Chile, Colombia,
    Mexico, Peru and Venezuela
  • OLS and FE estimation. Since OLS estimation are
    known to deal inadequately with time series and
    cross-section heterogeneity, we reported also
    Fixed Effects estimates (FEM estimators).

22
Determinants of capital flows
  • In order to determine if a Random Effects Model
    (REM) was an adequate econometric model for this
    analysis we realised the Hausman Test. The null
    hypothesis underlying the Hausman Test (FEM and
    REM estimators do not differ substantially) was
    rejected.
  • In order to avoid problems of endogeneity between
    independent and dependent variables we have also
    taken into account the first lag of each of the
    explanatory variables in the regressions. In
    fact, by taking the lagged explanatory variable
    we could solve causality problems which are
    common to capital flows analysis.
  • We present only the results of FE estimators with
    lagged explanatory variables (see annex for the
    others results)

23
Determinants of bond flows
24
Determinants of equity flows
25
Objective of the paper
I
Overview of the literature
II
Description of the data
III
Investments banks business and research
publications
IV
Emerging markets capital flows and research
publications
V
Conclusions
VI
26
Determinants of capital flows
  • 3 conclusions concerning the determinants of
    capital flows
  • The impact of investment banks recommendations
    on capital flows is positive and significant.
  • The impact of the recommendations given to
    external public debt goes beyond sovereign bond
    flows. Indeed, although their influence is minor,
    these recommendations also affect private equity
    flows.
  • 3. This new microeconomic variable improves the
    fit of capital flows regressions more than some
    traditional macroeconomic variables such as
    interest rates, economic growth and inflation
    rate.

27
Business and Investment banks recommendations
  • We can not reject the hypothesis that the
    information transmitted to investors could be
    biased with the purpose to obtain short term
    profits and to recommend optimistically the
    assets which banks are underwriters in an IPO.
  • Further research
  • The results are preliminary. We have in part
    neglected the role of the recommendations in the
    sell side long term business.
  • Indeed, further research must be done concerning
    the performance of these recommendations in terms
    of investment value and to contrast them with the
    underwriting activity.

28
Policy Lessons
  • There is a need for more detailed information
    disclosure by investment banks in order to
    determine if past recommendations are related to
    macroeconomic variables and financial variables
    or whether they are associated with their
    business in emerging economies.
  • Given that banks recommendations and portfolio
    flows are related, an international co-operation
    must be established in order to encourage
    investment banks to cover more countries.

29
ANNEXES
30
Investment banks recommendations
  • An example of the recommendation given by one of
    the most important actor in the Latin American
    Bond Market.

31
Investment banks recommendations
  • An example of the weight of some Latin American
    countries in the EMBI index (depends on the
    amount outstanding of sovereign debt).

32
Underwriters recommendations
  • 415 underwriters or Lead managers and 215
    sovereign issues. Almost 75 of the underwriters
    are located in Brazil, Argentina, Colombia and
    Mexico.

33
Underwriters recommendations Argentinean case
  • The Argentinean case is very useful, interesting
    and special case
  • 67 per cent of the recommendations were to
    maintain the positions in Argentinean External
    Debt (prior 2001)
  • Some of the comments given by banks months before
    the crisis were unrealistic
  • Morgan Stanley We are maintaining our Market
    Perform recommendation on Argentine
    bonds.Relaxation of fiscal targets and an
    innovative IMF-led financial package from
    creditors both improve Argentinas credit
    outlook. Argentina needs to raise an estimated
    2.6 billion to fulfil its first quarter
    financing requirements. New issues are expected
    to total 5.6 billion in 2001. Growth and fiscal
    performance are becoming the focus of investors
    attention. January 26, 2001.
  • Salomon Smith Barney (Citigroup) The successful
    implementation of the IMF support package with
    the associated debt management transactions and
    the change in the global outlook probably
    increases the chances that economic activity will
    pick up in the second half of the year. We
    therefore recommend a neutral position in
    external bonds and local currency instruments.
    January 17, 2001

34
Underwriters recommendations Argentinean case
Source Nieto Parra (2006) from Bloomberg
35
Underwriters recommendations
  • Underwriters recommendations vs.
    Recommendations given by other investment banks
  • - 75 of the Lead mangers advice was higher
    than or equal to that made by other investment
    banks.

36
Underwriters recommendations
  • Underwriters recommendations vs.
    Recommendations given by other investment banks
    during the announcement date of the issue of a
    bond.
  • - On average underwriters recommendations are
    more favourable than no-underwriters
    recommendations

37
Underwriters recommendations
  • What is the incentive that no-underwriters could
    have to give an equal or higher recommendation
    than underwriters?
  • For most of the Latin American countries 90 of
    the issues were realised by 10 investment banks

38
Underwriters recommendations
  • By calculating the HHI we obtained the same
    results
  • Theoretically, this market could be characterised
    by an imperfect competitive market in which
    underwriters are playing a repeated game.
  • By taking investment banks recommendations as a
    marketing product, it is then advantageous to
    investment banks to recommend a country even if
    at that period they have not been underwriters.

39
Determinants of bond flows
  • .

40
Determinants of bond flows
  • .

41
Determinants of bond flows
  • .

42
Determinants of equity flows
  • .

43
Determinants of equity flows
  • .

44
Determinants of equity flows
  • .
Write a Comment
User Comments (0)
About PowerShow.com