Do IPO Analysts Issue Unfavorable Recommendations on Non-IPO Firms?

Abstract:     
An analysis of 3,569 recommendations made by 1,601 IPO analysts from January 1997 through June 1999 indicates that analysts downgrade comparable non-IPO firms before they initiate research coverage on IPOs. For these non-IPO firms, receiving the rating before the IPO initiation results in a five-day abnormal return of -0.7%. Yet, IPO stocks on five days surrounding the last recommendation on non-IPOs report a significant abnormal return of +1.1%. Adjusting for other factors, downgrades of non-IPO stocks by analysts affiliated with the lead manager are negatively associated with the price performance of IPOs after the initial offering day. The evidence suggests that analysts are downgrading non-IPO stocks to support cold issues placed by the underwriters they are affiliated with.

Keywords: IPO, analysts, conflicts of interest

JEL Classification: G14, G24

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