Underwriter Analyst Recommendations: Conflict of Interest or Rush to Judgement

Abstract:     
This paper provides an analysis of the stock price impact of buy and sell recommendations by analysts for firms that went public in 1992. The market reaction to initial buy recommendations by underwriters is insignificant. While this is consistent with a market recognition of the potential conflict of interest faced by underwriters, it is also consistent with initial underwriter buy recommendations being uninformative since they are essentially reiterations of the implicit buy recommendations made in the IPOs. The market reaction to non-initial buys is significantly positive and larger than the reaction to recommendations by non-underwriter analysts. This supports the argument that underwriter analysts may be viewed as more knowledgeable than their competitors because they have superior information on the firm. We also find that initial underwriter buy recommendations are followed by negative post-recommendation stock price performance. Our results suggest that this negative post-recommendation performance is driven by the group of stocks for which the underwriter analysts reverse their buy recommendation with a later sell. The performance between initial buy and subsequent sell is insignificant. This suggests that rather than being a conflict of interest, the initial buy recommendation reflects a rush to judgement on the part of the underwriter analyst.

JEL Classification: G24, G14

working papers series