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The Relation between Analysts' Forecasts of Long-Term Earnings Growth and Stock Price Performance Following Equity Offerings

47 Pages Posted: 2 Jul 1999  

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting; University of California, Berkeley - Accounting Group

Amy P. Hutton

Boston College - Carroll School of Management

Richard G. Sloan

University of California, Berkeley - Accounting Group; University of Southern California - Leventhal School of Accounting

Date Written: June 1999

Abstract

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

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

Patricia M. Dechow (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Amy P. Hutton

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)

Richard G. Sloan

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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