The Consequences to Analyst Involvement in the IPO Process: Evidence Surrounding the JOBS Act

Abstract

The JOBS Act allows certain analysts to be more involved in the IPO process, but does not relax restrictions on analyst compensation structure. We find that these analysts initiate coverage that is more optimistically biased, less accurate, and generates smaller stock market reactions. Investors purchasing shares following these initiations lose over 3% of their investment by the firm’s subsequent earnings release. By contrast, issuers, analysts, and investment banks appear to benefit from this increased bias, as optimism is more positively associated with proxies for firm visibility and investment banking revenues when analysts are involved in the IPO process.

Keywords: Equity Analyst Research; Conflicts of Interest; JOBS Act; IPOs

JEL Classification: G24, G28, M41, K22, G14