Equity Ownership in IPO Issuers by Brokerage Firms and Analyst Research Coverage
57 Pages Posted: 25 Mar 2008 Last revised: 15 Jul 2016
Date Written: July 1, 2016
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: Suggested Citation