Investment Banking: More Bricks in the Wall

Regulators are introducing new rules to ensure the objectivity of stock analysts, but what's good for investors could be bad for CFOs.

On the whole, the future CFOs fear most is one with even more regulation in the research arena. “My main concern is the overreaction and the overregulation to solve a problem that the marketplace can solve on its own,” says Goldman. “It will be self-correcting.” The NASD and the SEC seem unwilling to wait to see if that’s true.

Kris Frieswick is a staff writer at CFO.

Quid Pro Quos

The CFO Survey of Investment-Banking Relationships

This survey, our third in a series of four on corporate-finance practices, focuses on investment-banking and research-analyst relationships. A questionnaire was E-mailed to senior financial executives; 142 responded, and their answers are presented here. Seventy-five respondents work at publicly traded companies. The respondents represent a broad range of company sizes and industries. Most are from companies with at least $100 million in revenues, and the most-represented industries were financial services and technology.

Some highlights of the survey results: Most financial executives say they don’t expect an analyst’s recommendation in return for underwriting business, nor do they ask analysts to change recommendations. Also, a third of respondents are giving more guidance to analysts than they did a year ago. And 9 out of 10 think that analysts should be paid independently of their firm’s investment-banking revenues.

The first two surveys in this series, on financial reporting and auditor-client relationships, respectively, appeared in the August and September issues of CFO. The final survey will focus on corporate-governance issues.

1. Have you purchased investment banking services in the past two years?

  • Yes: 47.6%
  • No: 52.4%

2. Does your investment bank require you to buy other products or services in return for underwriting your securities?

  • Yes: 12.2%
  • No: 87.8%

3. Have you ever asked that the bank charge less than 7 percent of investment-banking proceeds in return for underwriting business?

  • Yes: 25%
  • No: 75%

4. If your answer to Question 3 was yes, did the bank agree to lower the underwriting fee?

  • Yes: 90%
  • No: 10%

5. How much did you pay?

  • 5 ­- 6.99%: 66.7%
  • 3 – ­4.99%: 33.3%
  • < 3%: 0%

6. Will you ask that your investment bank charge less than 7 percent for underwriting securities during the next 12 months?

  • Yes: 43.6%
  • No: 56.4%

7. Have you ever received an allocation of IPO stock in exchange for current or promised business with the underwriter’s bank?

  • Yes: 2.1%
  • No: 97.9%

8. How much earnings guidance are you giving analysts now compared with a year ago?

  • More: 32.4%
  • Less: 13.2%
  • Same: 54.4%

9. Do you expect an investment bank’s analysts to recommend your stock in return for your underwriting business?

  • Yes: 23.2%
  • No: 76.8%

10. How often in the past five years have you asked that an underwriter’s analyst change his or her recommendation about your company’s stock?

  • Never: 91.3%
  • Once: 2.9%
  • Twice: 2.9%
  • More than twice: 2.9%

11. How many analysts currently cover your company?

  • 0: 20%
  • 1: 1.2%
  • 2­4: 17.6%
  • 5­7: 24.7%
  • 8+: 36.5%

12. Has an analyst ever stated or implied that coverage of your company was contingent on your buying of services at the analyst’s bank?

  • Yes: 8.7%
  • No: 91.3%

13. Do you think analysts should be paid independently of their firm’s investment-banking revenues?

  • Yes: 90.6%
  • No: 9.4%

14. Do you think research operations should be legally separated from investment banks?

  • Yes: 71.4%
  • No: 28.6%

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