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Derrien François

François Derrien's Research


 

PUBLICATIONS
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Systemic Risk in Clearing houses: Evidence from the European repo market”, forthcoming, Journal of Financial Economics (with Charles Boissel, Evren Ors and David Thesmar).

 

Abstract : We study how crises affect Centre Clearing Counterparties (CCPs). We focus on a large and safe segment of CCP-cleared repo market during the Eurozone sovereign debt crisis. We develop a simple model to infer CCP stress, which is measured as repo rates' sensitivity to sovereign CDS spreads and jointly captures (1) the effectiveness of haircut policies, (2) CCP-member default risk (conditional on sovereign default), and (3) CCP default risk (conditional on both sovereign and CCP-member default). During 2011, repo rates strongly respond to sovereign risk, particularly for GIIPS countries: repo investors behaved as if the conditional probability of CCP default was substantial.

 

 

Information Asymmetry, the Cost of Debt, and Credit Events: Evidence from Quasi-Random Analyst Disappearances,” 2016, Journal of Corporate Finance 39, 295-311 (with Ambrus Kecskes and Sattar Mansi).  

 

Abstract : We hypothesize that greater information asymmetry causes greater losses to debtholders. To test this, we identify exogenous increases in information asymmetry using the loss of an analyst that results from broker closures and broker mergers. We find that the loss of an analyst causes the cost of debt to increase by 25 basis points for treatment firms compared to control firms, and the rate of credit events (e.g., defaults) is roughly 100-150% higher. These results are driven by firms that are more sensitive to changes in information (e.g., less analyst coverage). The evidence is broadly consistent with both financing and monitoring channels, although only a financing channel explains the impact of the loss of an analyst on the firm's cost of debt.

 

 

Investor Horizons and Corporate Policies,2013, Journal of Financial and Quantitative Analysis 48 (6), 1755-1780 (with Ambrus Kecskés and David Thesmar).

 

Abstract : We study the effect of investor horizons on corporate behavior. In perfect capital markets, investor horizons are irrelevant for corporate policies, but when a firm ismispriced, the horizons of its investors matter. We argue that longer investor horizons attenuate the effect of mispricing on corporate policies. Consistent with our argument, we find that when a firm is undervalued, greater long-term investor ownership is associated with more investment, more equity financing, and less payouts to shareholders. Our results do not appear to be explained by long-term investor self-selection, monitoring (corporate governance), or concentration (blockholdings).

 

 

The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage,” 2013, Journal of Finance 68(4), 1407-1440 (with Ambrus Kecskés).

 

Abstract : We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference-in-differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst.

 


Auctioned IPOs: The U.S. Evidence,” 2010, Journal of Financial Economics 98(2), 177-194, Lead article (with François Degeorge and Kent Womack).

 
AbstractBetween 1999 and 2007, WR Hambrecht has completed 19 IPOs in the U.S. using an auction mechanism. We analyze investor behavior and mechanism performance in these auctioned IPOs using detailed bidding data. The existence of some bids posted at high prices suggests that some investors (mostly retail) try to free-ride on the mechanism. But institutional demand in these auctions is very elastic, suggesting that institutional investors reveal information in the bidding process. Investor participation is largely predictable based on deal size, and demand is dominated by institutions. Flipping is at most as prevalent in auctions as in bookbuilt deals. But, unlike in bookbuilt deals, investors in auctions do not flip their shares more in "hot" deals. Finally, we find that institutional investors, who provide more information, are rewarded by obtaining a larger share of the deals that have higher 10-day underpricing.  Our results therefore suggest that auctioned IPOs could be an effective alternative to traditional bookbuilding.
 
 
How Much Does Investor Sentiment Really Matter for Equity Issuance Activity? ” 2009, European Financial Management 15(4), pp 787-813 (with Ambrus Kecskés).
 
Abstract : We ask whether economic fundamentals drive IPO volume. We focus on the petroleum industry, in which economic fundamentals can be easily identified and measured. We investigate a sample of over 600 Canadian petroleum IPOs. We find that IPO volume is synchronous with a variety of measures of activity and investment in the petroleum industry. By contrast, investor sentiment explains little of the time-series variation of IPO volume. We also provide evidence that IPOs promptly invest the funds that they raise from the public. We conclude that fundamentals do drive IPO volume.
 

Analyst Hype in IPOs: Explaining the Popularity of Bookbuilding,” 2007, Review of Financial Studies 20 (4), pp1021-1058 (with François Degeorge and Kent Womack). 
 
Abstract : The bookbuilding IPO procedure has captured significant market share from auction alternatives recently, despite the significantly lower costs related to the auction mechanism.  In   Book-built issues were more likely to be followed and positively recommended by lead underwriters.  Even nonunderwriters’ analysts promote book-built issues more in order to curry favor with the IPO underwriter for allocations of future deals.  Yet we do not observe valuation or post-IPO return differentials that suggest these types of promotion have any value to the issuing firm. France , where both mechanisms were used in the 1990s, the ostensible advantages of bookbuilding were advertising-related benefits.
 
 
The Initial Public Offerings of Listed Firms,” 2007 , Journal of Finance 62 (1), pp 447-479 (with Ambrus Kecskés). 
 
Abstract : A number of firms in the United Kingdom list without issuing equity and then issue equity shortly thereafter. We argue that this two-stage offering strategy is less costly than an initial public offering (IPO) because trading reduces the valuation uncertainty of these firms before they issue equity. We find that initial returns are 10% to 30% lower for these firms than for comparable IPOs, and we provide evidence that the market in the firm’s shares lowers financing costs. We also show that these firms time the market both when they list and when they issue equity.
 

IPO Pricing in 'Hot' Market Conditions: Who Leaves Money on the Table? ” 2005, Journal of Finance, 60 (1), pp 487-521.
 
Abstract : This paper explores the impact of investor sentiment on IPO pricing. Using a model in which the aftermarket price of IPO shares depends on the information about the intrinsic value of the company and investor sentiment, I show that IPOs can be overpriced and still exhibit positive initial return. A sample of recent French offerings with a fraction of the shares reserved for individual investors supports the predictions of the model. Individual investors’ demand is positively related to market conditions. Moreover, large individual investors’ demand leads to high IPO prices, large initial returns, and poor long-run performance.
 
 
Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets,” 2003, Review of Financial Studies 16 (1), pp 31-61 (with Kent Womack).  
 
Abstract : Market returns before the offer price is set affect the amount and variability of initial public offering (IPO) underpricing. Thus, an important question is “what IPO procedure is best adapted for controlling underpricing in “hot” versus “cold” market conditions?” The French stock market offers a unique arena for empirical research on this topic, since three substantially different issuing mechanisms (auctions, bookbuilding, and fixed price) are used there. Using 1992-1998 data, we find that the auction mechanism is associated with less underpricing and lower variance of underpricing. We show that the auction procedure’s ability to incorporate more information from recent market conditions into the IPO price is an important reason.
 

Les Déterminants de la Performance à Long Terme des Introductions en Bourse: Le Cas Français, ” 2001 , Revue Banque et Marchés 55, pp 8-18 (with François Degeorge).  
 
Abstract : We study the stock price performance of 243 French companies that went public on the French Second Marché and Nouveau Marché between 1991 and 1998. First, the stock price performance is not significantly negative over a 36-month period. Second, the IPO and firm characteristics of the offerings do not explain this performance. This suggests that the IPO price correctly summarizes the information at hand at the time of the offering on average.
 

 
WORKING PAPERS 
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Do Analysts' Preferences Affect Corporate Policies?” (with François Degeorge, Ambrus Kecskes, and Sébastien Michenaud).   

 

Abstract : Equity research analysts tend to cover firms about which they have favorable views. We exploit this tendency to infer analysts’ preferences for corporate policies from their coverage decisions. We then use exogenous analyst disappearances to examine the effect of these preferences on corporate policies. After an analyst disappears, firms change their policies in the direction opposite to the analyst’s preferences. The influence of analyst preferences on policies is stronger for firms for which analyst coverage is likely to matter more: young firms, and firms with higher market valuations. Our results suggest that firms choose their corporate policies, in part, to be consistent with the preferences of their analysts.

 
 

The Effects of investment Bank Rankings: Evidence from M&A League Tables,” (with Olivier Dessaint).   

 

Abstract : This paper explores how league tables, which are rankings based on market shares, influence the M&A market. A bank’s league table rank predicts its future deal flow, above and beyond other determinants of this future deal flow. This creates incentives for banks to manage their league table ranks. League table management tools include selling fairness opinions and reducing fees. Banks use such tools mostly when their incentives to do so are high: when a transaction affects their league table position or when they lost ranks in recent league tables. League table management seems to affect the quality of M&A transactions.

 
 
 
 
IPO Performance and Earnings Expectations: Some French Evidence,” (with François Degeorge). 
 
Abstract : We examine the long-run stock price performance of an exhaustive sample of 243 French IPOs conducted between 1991 and 1998. Using a variety of benchmarks, we find that on average French IPOs do not underperform.  Our finding is consistent with Brav and Gompers (1997), who argue that the disappointing stock price performance of U.S. IPOs largely disappears once proper risk adjustments are introduced.  We also analyze the cross-section of IPO performance, introducing a number of ex ante variables.  None of them exhibits significant explanatory power in our sample, suggesting that no subcategory of IPOs systematically underperforms (or overperforms) over the entire 36-month period-- at least when the subcategory is defined using information known at the time of the IPO. Next, we ask whether investors’ expectations are embodied in earnings forecasts issued at the time of the IPO.  We look at earnings forecasts published in the IPO prospectuses, as well as forecasts by financial analysts.  We distinguish between financial analysts affiliated with the bank taking the company public, and unaffiliated analysts.  We find that prospectus forecasts and forecasts issued by analysts affiliated to underwriters are more optimistically biased than forecasts issued by unaffiliated financial analysts.  Analysts forecasts for IPO companies are not more biased than forecasts issued for non-IPO firms, suggesting that accuracy incentives may be high for analysts dealing with newly listed companies.  Finally, we find that analysts’ forecast errors are the main driver of IPOs’ stock price performance: they appear to embody investors’ expectations at the time of the IPO.
 
 
Currying Favor to Win IPO mandates
 
Abstract : This paper investigates whether a bank can win IPO mandates by issuing flattering analyst recommendations to recent IPOs. We find that security analysts increase their bank’s chance of comanaging an IPO when they issue generous recommendations to recent IPOs managed by the IPO’s lead manager. However, this result holds only for prestigious banks. Less prestigious banks, whose recommendations are less influential, do not obtain such rewards from lead managers. We also find that security analysts increase their bank’s chance of managing future IPOs when they issue generous recommendations to recent IPOs managed by their own bank. This result, however, holds only for non-prestigious banks. These banks, which are not the issuers’ first choice, appear to advertize their services by issuing generous analyst coverage to their recent offerings.