47 Pages Posted: 2 Jul 1999
Date Written: June 1999
We evaluate the role of sell-side analysts' long-term earnings growth forecasts in the pricing of common equity offerings. We find that, in general, sell-side analysts' long-term growth forecasts are systematically overly optimistic around equity offerings and that analysts employed by the lead managers of the offerings make the most optimistic growth forecasts. Additionally, we find a positive relation between the fees paid to the affiliated analysts' employers and the level of the affiliated analysts' growth forecasts. We also document that the post-offering under performance is most pronounced for firms with the highest growth forecasts made by affiliated analysts. Finally, we demonstrate that the post-offering under performance disappears once we control for the over optimism in earnings growth expectations. Thus, the evidence presented in this paper is consistent with the 'equity issue puzzle' arising from overly optimistic earnings growth expectations held at the time of the offerings.
JEL Classification: G12, G29, M41
Suggested Citation: Suggested Citation
Dechow, Patricia M. and Hutton, Amy P. and Sloan, Richard G., The Relation between Analysts' Forecasts of Long-Term Earnings Growth and Stock Price Performance Following Equity Offerings (June 1999). Available at SSRN: https://ssrn.com/abstract=168488 or http://dx.doi.org/10.2139/ssrn.168488
By John Graham
By Owen Lamont