Pre-IPO Hype by Affiliated Analysts: Motives and Consequences
51 Pages Posted: 7 Nov 2019
Date Written: March 1, 2019
Researchers and practitioners debate on the merit of recent US regulatory changes about pre-IPO analyst coverage and involvement in the IPO process. We contribute to this debate by examining underwriter-affiliated analyst coverage prior to IPOs using data from China. We document that affiliated analysts make highly overoptimistic forecasts about IPO clients. More optimistic forecasts are associated with poorer long-term stock performance. IPO investors are insensitive to analyst hype because the offer price is set sufficiently lower than short-term postmarket prices. Further investigation suggests that underwriters gain monetary benefits from hyping and they hype to inflate prices.
Keywords: affiliated analyst, pre-IPO analyst coverage, analyst hype, quiet period rules, underwriters, price efficiency
JEL Classification: D82, G14, G23, G24, G28, K22
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