Analysts’ Advice on IPOs and Regulations: An Analysis of US and European Markets

57 Pages Posted: 29 Nov 2017 Last revised: 16 Aug 2018

See all articles by Romain Boissin

Romain Boissin

University of Montpellier

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management

Ajai K. Singh

Department of Finance, University of Central Florida

Date Written: August 14, 2018

Abstract

Using recommendations and target prices on initial public offerings (IPOs), we examine the impact of regulations in the US and European Union (EU) markets that were aimed at curbing conflicts of interest in sell-side research. Conflicted analysts, proxied by whether their brokerage houses acted as lead or co-managers in the IPO process, issue more optimistic recommendations in the pre-regulatory period both in the US and EU markets, but this extra optimism is absent after the adoption of regulations. A similar pattern emerges when looking at returns implied from target prices for US IPOs. Investors seem to capture the pattern, as they discount optimistic recommendations from conflicted analysts before, but not after, the new regulations. Using the staggered implementation of the new regulations—whereby US regulations take place strictly before any of the changes in the EU markets—we show that US brokers take the new modus operandi to Europe. In the time between the passage of US regulations and EU regulations, US brokers in the lead role act in Europe similarly to the way they started acting in US. The EU brokers continued with their optimistic projections until the implementation of the local regulations.

Keywords: Analysts, Recommendations, Target Prices, Conflicts of Interest, Regulations

JEL Classification: G10, G24, G28

Suggested Citation

Boissin, Romain and Madureira, Leonardo and Singh, Ajai K., Analysts’ Advice on IPOs and Regulations: An Analysis of US and European Markets (August 14, 2018). Available at SSRN: https://ssrn.com/abstract=3077362 or http://dx.doi.org/10.2139/ssrn.3077362

Romain Boissin

University of Montpellier ( email )

Avenue de la Mer Site Richter
163 Rue Auguste Broussonnet
Montpellier, Cedex 2 34090
France

Leonardo Madureira (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)

HOME PAGE: http://faculty.weatherhead.case.edu/madureira/

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

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