Analyst Following of Initial Public Offerings
Raghuram G. Rajan
University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
London Business School; Centre for Economic Policy Research (CEPR)
J. OF FINANCE, Vol. 50 No. 2, June 1997
We examine data on analyst following for a sample of initial public offerings (IPOs) completed over the 1975-1987 period to see how they relate to three well-documented IPO anomalies. We find that higher underpricing leads to increased analyst following. Analysts are overoptimistic about the earnings potential of recent IPOs and about their long term growth prospects. More firms complete IPOs when analysts are particularly optimistic about the growth prospects of recent IPOs. In the long run, IPOs have better stock price performance when analysts ascribe low growth potential to these firms than when they ascribe high growth potential. These results suggest that the anomalies documented in the IPO market may, at least partially, be driven by overoptimism.
JEL Classification: G30
Date posted: March 31, 1997