Equity ownership in IPO issuers by brokerage firms and affiliated research coverage

We examine the relation between brokerage firms research coverage and their equity ownership in IPO issuers due to earlier venture investments. Equity ownership aligns the interest of brokerage firms and IPO issuers by inducing affiliates to provide research coverage, especially by Institutional Investor all star analysts. Equity ownership also enhances the credibility of affiliated analysts with investors and does not encourage affiliated analysts to provide booster shots to issuers’ stock prices. The recommendations of affiliated analysts are less overly optimistic and produce larger abnormal announcement returns, especially for issuers with greater information asymmetry. Our results indicate that offering venture investment and analyst research under one roof benefits both issuers and IPO investors and does not create serious conflicts of interest between affiliated firms and investors. Our results also yield several implications for the recent NASD and NYSE rules changes regarding equity ownership of IPO firms and affiliated analysts.