Underwriting Relationships and Analysts' Earnings Forecasts and Investment Recommendations

Posted: 25 Jun 1997

See all articles by Hsiou-Wei Lin

Hsiou-Wei Lin

National Taiwan University

Maureen F. McNichols

Stanford University

Date Written: April 1997


This paper examines the effect of underwriting relationships on analysts' earnings forecasts and recommendations. We find that lead and co-underwriter analysts' recommendations are more favorable than those of unaffiliated analysts although their earnings forecasts are not significantly different. We also find that previously affiliated analysts who are not chosen to participate in a subsequent equity offering have issued recommendations comparable to unaffiliated analysts, and significantly less favorable than lead underwriter analysts. Our evidence suggests that issuing companies select the investment banks whose analysts have more favorable views, and is inconsistent with previously affiliated analysts issuing more favorable recommendations to curry favor with management. We find that investors earn similar returns by following lead and unaffiliated analysts' strong buy and buy recommendations, but that more negative returns are associated with lead hold than unaffiliated hold recommendations. This evidence indicates that overoptimism by affiliated analysts, whether due to selection bias or strategic bias, appears to be confined to analysts' hold recommendations.

JEL Classification: G29, G24

Suggested Citation

Lin, Hsiou-Wei and McNichols, Maureen F., Underwriting Relationships and Analysts' Earnings Forecasts and Investment Recommendations (April 1997). Available at SSRN: https://ssrn.com/abstract=8386

Hsiou-Wei Lin

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106

Maureen F. McNichols (Contact Author)

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

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