36 Pages Posted: 16 Mar 2007
Date Written: March 14, 2007
We examine a comprehensive set of 524 pre-IPO analyst reports made available to institutional investors and the broker's retail sales force in the course of marketing equity IPOs in France over the period 1991-2002. Exploiting exogenous variation in the behavior of affiliated and independent analysts caused by well-known conflicts of interest, we find that analyst reports are used to "hype" the issuer's stock in harder-to-place offerings and when more stock is reserved for allocation to retail investors. Moreover, retail (but not institutional) demand is stimulated by hype, and this demand boost in turn enables the underwriting bank to increase the offer price for the benefit of its corporate client. These results underscore the marketing (as opposed to information production) role of research analysts. They also suggest that analysts sometimes pander to certain psychological biases retail investors may be prone to, consistent with recent theoretical models.
Keywords: Retail investors, Marketing, Hype, IPOs, Analyst research, Conflicts of interest, Behavioral Finance
JEL Classification: G14, G24
Suggested Citation: Suggested Citation