Equity Ownership in IPO Issuers by Brokerage Firms and Analyst Research Coverage

57 Pages Posted: 25 Mar 2008 Last revised: 15 Jul 2016

Qiang Kang

Florida International University (FIU) - Department of Finance

Xi Li

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); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Date Written: July 1, 2016

Abstract

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.

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

Suggested Citation

Kang, Qiang and Li, Xi and Masulis, Ronald W., Equity Ownership in IPO Issuers by Brokerage Firms and Analyst Research Coverage (July 1, 2016). Available at SSRN: https://ssrn.com/abstract=1107634 or http://dx.doi.org/10.2139/ssrn.1107634

Qiang Kang

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Xi Li (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon
Hong Kong

Ronald W. Masulis

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Paper statistics

Downloads
326
Rank
74,003
Abstract Views
1,767