52 Pages Posted: 3 May 2012
Date Written: March 1, 2012
This paper examines the effects of underwriting relationships on analyst herding behavior. The results suggest that analysts employed by the lead-underwriter banks of seasoned equity offerings are more likely to provide bold forecasts than unaffiliated analysts, indicating that institutional affiliations surrounding analysts, as well as their individual characteristics, are associated with their herding tendency. In spite of conflicts of interest from the investment banking business, lead-underwriter analysts provide more accurate earnings forecasts than unaffiliated analysts, and their superiority is more obvious in the sub-sample of bold forecast revisions. However, an additional investigation shows that investment banking affiliations also influence analysts' herding tendency in stock recommendations, implying the potential prevalence of optimism among analysts. We also find that the difference in forecast boldness between affiliated and unaffiliated analysts has significantly diminished since the passage of Regulation Fair Disclosure, which prohibits managers' selective disclosures to market participants.
Keywords: herding, analyst forecasts, underwriting relationship, seasoned equity offerings, forecast accuracy, conflicts of interest
JEL Classification: M41, G24, C35
Suggested Citation: Suggested Citation
Kim, Chan-gu and Jung, Kooyul, Underwriting Relationships and Analyst Herding Behavior Around Equity Offerings (March 1, 2012). KAIST Business School Working Paper Series No. 2012-004. Available at SSRN: https://ssrn.com/abstract=2050209 or http://dx.doi.org/10.2139/ssrn.2050209