Michaely,and O'Hara(2000)).Advice on acquisitions and follow-on stock offerings frequently follows as well.The underwriter almost always assigns an analyst to follow the company and provide research coverage.Thus,securities underwriting capabilities are combined with M&A advisory capabilities,as well as sales and trading capabilities.All of these activities are information-intensive activities."Chinese walls,"which are supposed to be as impregnable as the Great Wall of China,whereby proprietary information possessed in the M&A advisory function is not disclosed to stock traders,are supposed to exist.In the course of assisting in the issuance of securities,investment bankers perform "due diligence"investigations.In the M&A advisory role, they produce"fairness opinions."Investment bankers are thus putting their reputations on the line, certifying for investors that the terms of the deal are fair and that material information is reflected in the price (Chemmanur and Fulghieri (1994)). In the U.S.,federal government regulation of securities markets is based upon a notion of caveat emptor (buyer beware)with full disclosure.The U.S.Securities and Exchange Commission(SEC)regulates securities markets.In addition,self-regulatory organizations such as the New York Stock Exchange and the National Association of Securities Dealers impose requirements on members,and the threat of class action lawsuits on behalf of investors constrains the actions of issuers and underwriters.Prospectuses are required to contain all material information,with specific requirements for the amount and form of accounting disclosures.In Europe,there is no prohibition on underwriters producing research reports immediately preceding a securities offering.In the U.S.,firms going public and their underwriters are prohibited from disclosing projections that are not in the prospectus during the "quiet period,"starting before a firm announces its IPO and ending 40 calendar days after the offer.An exception to this is that limited oral disclosures may be made during"road show" presentations,where attendance is restricted to institutional investors.In 1999,the SEC started permitting certain qualified individual investors to have access to webcasts of the road show. Typically,the managing underwriters issue research reports with "buy"or "strong buy" recommendations as soon as the quiet period ends.Michaely and Womack(1999)present evidence that sell-side analysts affiliated with managing underwriters face conflicts of interest The conventional wisdom is that analysts have become"cheerleaders."The three reasons for this are that 1)they are dependent upon access to corporate managers for information,2)their compensation is tied to whether their investment banking firm is chosen as a managing underwriter on equity or junk-bond offerings,or as an advisor on M&A deals,and 3)the institutional clients that pay attention to a report are likely to be long in the stock.In 2002,new rules were announced in an attempt to limit the conflicts of interest and alert investors to the conflicts On the front page of a prospectus,the offer price and underwriting discount(commission) are disclosed.The underwriter is prohibited from distributing any securities at a price above the stated offer price,although if the issue fails to sell out at the offer price,the underwriter may sell 1A due diligence investigation involves quizzing management to uncover material information,some of it proprietary in nature,that is relevant for valuation purposes.A fairness opinion is a formal statement that the terms of an M&A deal or leveraged buyout are reflective of"fair"market valuation,including appropriate control premiums or liquidity discounts. 55 Michaely, and O’Hara (2000)). Advice on acquisitions and follow-on stock offerings frequently follows as well. The underwriter almost always assigns an analyst to follow the company and provide research coverage. Thus, securities underwriting capabilities are combined with M&A advisory capabilities, as well as sales and trading capabilities. All of these activities are information-intensive activities. “Chinese walls,” which are supposed to be as impregnable as the Great Wall of China, whereby proprietary information possessed in the M&A advisory function is not disclosed to stock traders, are supposed to exist. In the course of assisting in the issuance of securities, investment bankers perform “due diligence” investigations. In the M&A advisory role, they produce “fairness opinions.” Investment bankers are thus putting their reputations on the line, certifying for investors that the terms of the deal are fair and that material information is reflected in the price (Chemmanur and Fulghieri (1994)).1 In the U.S., federal government regulation of securities markets is based upon a notion of caveat emptor (buyer beware) with full disclosure. The U.S. Securities and Exchange Commission (SEC) regulates securities markets. In addition, self-regulatory organizations such as the New York Stock Exchange and the National Association of Securities Dealers impose requirements on members, and the threat of class action lawsuits on behalf of investors constrains the actions of issuers and underwriters. Prospectuses are required to contain all material information, with specific requirements for the amount and form of accounting disclosures. In Europe, there is no prohibition on underwriters producing research reports immediately preceding a securities offering. In the U.S., firms going public and their underwriters are prohibited from disclosing projections that are not in the prospectus during the “quiet period,” starting before a firm announces its IPO and ending 40 calendar days after the offer. An exception to this is that limited oral disclosures may be made during “road show” presentations, where attendance is restricted to institutional investors. In 1999, the SEC started permitting certain qualified individual investors to have access to webcasts of the road show. Typically, the managing underwriters issue research reports with “buy” or “strong buy” recommendations as soon as the quiet period ends. Michaely and Womack (1999) present evidence that sell-side analysts affiliated with managing underwriters face conflicts of interest. The conventional wisdom is that analysts have become “cheerleaders.” The three reasons for this are that 1) they are dependent upon access to corporate managers for information, 2) their compensation is tied to whether their investment banking firm is chosen as a managing underwriter on equity or junk-bond offerings, or as an advisor on M&A deals, and 3) the institutional clients that pay attention to a report are likely to be long in the stock. In 2002, new rules were announced in an attempt to limit the conflicts of interest and alert investors to the conflicts. On the front page of a prospectus, the offer price and underwriting discount (commission) are disclosed. The underwriter is prohibited from distributing any securities at a price above the stated offer price, although if the issue fails to sell out at the offer price, the underwriter may sell 1 A due diligence investigation involves quizzing management to uncover material information, some of it proprietary in nature, that is relevant for valuation purposes. A fairness opinion is a formal statement that the terms of an M&A deal or leveraged buyout are reflective of “fair” market valuation, including appropriate control premiums or liquidity discounts