Orphan versus Non Orphan IPOs: What Value Stems from the Coverage of Financial Analysts?
34 Pages Posted: 12 May 2011
Date Written: May 1, 2011
This paper examines the long run performance of IPOs carried out between 1991 and 2005. By using various methodologies, we find that IPOs in our sample performed negatively relative to comparison portfolios over the 1991-2005 horizon. This abnormal long run performance is much severe for orphans’ IPOs (without financial recommendation) than non orphans’ IPOs from three to five-year horizon (statistically significant). The evidence suggests that analyst coverage is indeed important to issuing firm but the market do not fully incorporate the perceived value of this coverage. Further analysis reveals that this outperformance by non orphan stems from high coverage.
Investors pay more attention for non orphan when IPOs are non venture capital backed, with a small underwriting syndicate and low underpriced. Over the 1991-2005 period, analyst’s affiliation does not appear to matter. This result is inconsistent with the conflict of interest hypothesis (Michaely and Womack, 1999). We establish that analyst recommendations are significantly related to long run performance of IPOs. Hence, we corroborate the crucial role of financial analysts in producing and interpreting IPOs’ financial releases.
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