Analyst Behavior Following IPOs: The “Bubble Period” Evidence

We examine over 7,400 analyst recommendations for IPO firms during 1999-2000. We find that initiations at the end of the quiet period come almost exclusively from the analysts of managing underwriters while initiations afterwards are predominantly from unaffiliated analysts. Once we control for the effect of quiet period versus later initiations, we find little evidence of a distinction between the market reaction to affiliated versus non-affiliated analyst initiations. On the other hand, lead underwriter reiterations, upgrades, and downgrades result in a greater market response. These results suggest that either (1) investors are unaware of the potential bias in recommendations from affiliated underwriters or (2) affiliated underwriter recommendations are, on balance, more credible. Finally, we find the number of analysts covering a company during the year following its IPO does not depend on the number of managing underwriters, contrary to the conventional wisdom that issuing firms are buying additional analyst coverage by hiring incremental comanagers at the IPO stage. Analyst Behavior Following IPOs: The “Bubble Period” Evidence