Pre-IPO Hype by Affiliated Analysts: Motives and Consequences
70 Pages Posted: 7 Nov 2019 Last revised: 12 Nov 2022
Date Written: November 11, 2022
Abstract
We provide the first study of underwriter-affiliated analysts’ pre-IPO research coverage and its impact on stock prices. Using proprietary data on a sample of Chinese IPOs, we document that affiliated analysts make highly overoptimistic forecasts about IPO clients. Analyst hype inflates both the offer price and the aftermarket price. Consistent with the sentiment theory, IPO investors are insensitive to analyst hype because the offer price is set sufficiently lower than the aftermarket price. The results hold when we instrument analyst hype with a variable that affects their hyping incentive. We also utilize a regulatory change as a quasi-experiment. Our analysis contributes to the debate about regulations on pre-IPO information provision.
Keywords: pre-IPO research, affiliated analyst, forecast bias, analyst hype, quiet period rules, underwriters, price efficiency
JEL Classification: D82, G14, G24, G28, K22
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