We find evidence that conflicts of interest arising from mergers and acquisitions (M&A) relations influence analysts' recommendations, corroborating regulators' and practitioners' suspicions in a setting, i.e., M&A relations, not previously examined in research on analyst conflicts. In addition, the M&A context allows us to disentangle the conflict of interest effect from selection bias. We find that analysts affiliated with acquirer advisors upgrade acquirer stocks around M&A deals, even around all-cash deals, in which selection bias is unlikely. Also consistent with conflict of interest but not selection bias, target-affiliated analysts publish optimistic reports about acquirers after, but not before, the exchange ratio of an all-stock deal is set.

Little evidence exists on whether boards help managers make better decisions. We provide evidence that strong and independent boards help overconfident chief executive officers (CEOs) avoid honest mistakes when they seek to acquire other companies. In addition, we find that once-overconfident CEOs make better acquisition decisions after they experience personal stock trading losses, providing evidence that a manager’s recent personal experience, and not just educational and early career experience, influences firm investment policy. Finally, we develop and validate a new CEO overconfidence measure that is easily constructed from machine-readable insider trading data, unlike previously used measures.

Although a large body of research has investigated the effects of short sale constraints, very little is understood about the origin of these constraints in the one-trillion-dollar equity lending market. Using a unique database comprising data from twelve lenders, we find significant dispersion in share loan fees across lenders, and we find that the dispersion is increasing in share loan demand and various proxies for search costs, including a stock's illiquidity and the number of small lenders making loans. These findings are consistent with the existence of search frictions between share borrowers and lenders, as Duffie, Garleanu, and Pedersen (2002) suggest. We further analyze the effect of search frictions by examining the response of shorting cost to exogenous shocks in demand. We find that for stocks with moderate demand, loan fees are largely insensitive to demand shocks. However, for stocks with high demand, an increase in demand triples the already higher abnormal loan fees. Our findings help reconcile seemingly conflicting findings in the literature regarding the existence of both small and large effects of shifts in demand on price. We highlight the importance of search costs by showing that the various parameters in firms' share loan supply schedules are closely related to crosssectional differences in search costs. We conclude that short sale constraints could be slackened by the reintroduction of a central clearinghouse of share loans, which would reduce search costs.

Although a large body of research has investigated the effects of short sale constraints, very little is understood about the origin of these constraints in the one-trillion-dollar equity lending market. Using a unique database comprising data from twelve lenders, we find significant dispersion in share loan fees across lenders, and we find that the dispersion is increasing in share loan demand and various proxies for search costs, including a stock's illiquidity and the number of small lenders making loans. These findings are consistent with the existence of search frictions between share borrowers and lenders, as Duffie, Garleanu, and Pedersen (2002) suggest. We further analyze the effect of search frictions by examining the response of shorting cost to exogenous shocks in demand. We find that for stocks with moderate demand, loan fees are largely insensitive to demand shocks. However, for stocks with high demand, an increase in demand triples the already higher abnormal loan fees. Our findings help reconcile seemingly conflicting findings in the literature regarding the existence of both small and large effects of shifts in demand on price. We highlight the importance of search costs by showing that the various parameters in firms' share loan supply schedules are closely related to crosssectional differences in search costs. We conclude that short sale constraints could be slackened by the reintroduction of a central clearinghouse of share loans, which would reduce search costs.

We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties, or from a focus on short-term profits at the expense of long-term value. Bondholders and buyers of private equity portfolio companies represent the two potential sources of wealth transfers. Yet, we find that public companies benefit when they buy financial sponsors' portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run post-transaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity have no relation to future portfolio company distress, suggesting that bondholders are not suffering systematic wealth losses, either. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism.