Equity Ownership in IPO Issuers by Brokerage Firms and Analyst Research Coverage
Florida International University (FIU) - Department of Finance
Hong Kong University of Science & Technology (HKUST)
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
July 1, 2016
We examine the quality of brokerage firm analyst coverage when they have venture capital investments in IPO issuers. We explore whether combining these activities compromises the objectivity of analyst reports given brokerage firm incentives to support IPO issues where they are shareholders. Alternatively, brokerage shareholdings could enhance affiliated analyst credibility with investors and discourage them from providing overly optimistic recommendations. We find having brokerage firms with venture capital investment and analyst coverage benefits IPO investors. We observe that affiliated analyst recommendations are less optimistic and produce larger abnormal announcement returns than unaffiliated analysts, especially for stocks having greater information asymmetry.
Number of Pages in PDF File: 57
Keywords: sell-side analysts, analyst stock recommendations, IPOs, asymmetric information, conflicts of interest, venture capital investment, brokerage firms, reputation incentives, equity ownership, universal banking, financial institutions
JEL Classification: G24, G28, G38, G14
Date posted: March 25, 2008 ; Last revised: July 15, 2016
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