Comments on “Does Syndicate Pressure Affect Analysts’ Incentive to Produce Information? Evidence from Recommended Firms’ Securities Class Action Lawsuits” Authors: 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

2 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) ．

3 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.

4 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

5 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.

6 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.

7 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.

8 Not To Be Networking Type 3 banks can organize syndicates themselves, and they don’t need to rely upon the networking relations with the main banks. Type 5 banks are basically on their own. They don’t need to curry favor from other banks. They are not bound by syndicate pressures.

9 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.

10 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.

11 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.

12 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.

13 Comment: Hypotheses In concluding the SP and IS hypotheses, the authors try to compare the promptness in issuing downgrades between unaffiliated syndicate banks (Types 3&4) 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.

14 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.

15 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.

16 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?

17 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?

18 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 doesn’t say anything about the informativeness of the downgrade announcements.

19 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.

20 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.

21 A Philosophical Question The paper’s evidence is consistent with the implications of SP Hypothesis. But shouldn’t 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.

22 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.