Equity Ownership in IPO Issuers by Brokerage Firms and Analyst Research Coverage
Hong Kong University of Science & Technology
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
August 16, 2013
We examine the relation between brokerage firm research coverage and their venture related equity ownership in IPO issuers. A major concern of investors and regulators is that combining these activities can compromise the objectivity of analyst reports given brokerage firm incentives to support IPO issuers in which they have shareholdings. Alternatively, brokerage shareholdings could enhance affiliated analysts’ credibility with investors and discourage affiliated analysts from providing booster shots to issuer stock prices. Brokerage firm shareholdings could also align its interests with IPO issuers by inducing affiliated firms to provide research coverage of IPO issuers by prestigious Institutional Investor all star analysts. Our results indicate that offering venture investment and analyst research under one roof benefits both issuers and IPO investors and does not create serious conflicts of interest between affiliated firms and investors. We find recommendations of affiliated analysts are less overly optimistic and produce larger abnormal announcement returns, especially for issuers with greater information asymmetry. Our results also yield a significant implication for the recent NASD and NYSE rule changes regarding required analyst disclosure of brokerage firms’ IPO equity ownership when making recommendations.
Number of Pages in PDF File: 53
Keywords: stock recommendations, sell-side analyst, equity ownership, universal banking, financial institutions
JEL Classification: G24, G28, G29, G38, G14working papers series
Date posted: March 25, 2008 ; Last revised: August 18, 2013
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