Analyst coverage and IPO management forecasts

Natalia Chatalova, Janice C.Y. How and Peter Verhoeven

Journal of Corporate Finance, 2016, vol. 39, issue C, 263-277

Abstract: Given the all-importance of analyst coverage for IPO firms, we examine the interaction between the initiation of analyst coverage and management forecast disclosure in IPO prospectuses. We find that IPO firms that provide a prospectus forecast are more likely to receive coverage (and earlier), particularly from lower quality analysts. The depth of coverage, measured by the number of analysts issuing a recommendation on the firm, is also greater for forecasters. These results hold after controlling for potential endogeneity due to simultaneity in management decision to provide a forecast and analysts' decision to cover the firm. Further analyses show that reputation concerns matter to analyst coverage decisions — conditional on firms providing a prospectus forecast, the likelihood of receiving coverage decreases with the magnitude of the absolute management forecast error. There is evidence of quid pro quo where the analyst working for the underwriter of the IPO aligns her forecast with the management forecast more than unaffiliated analysts. Insofar as management forecasts are important to coverage decision and analyst coverage is valuable, our research has important implications for strengthening the safe harbour provision for prospectus forecasts in litigious environments such as that in the U.S.

Keywords: Analyst coverage; Analyst initiation; IPO; Management forecast (search for similar items in EconPapers)
JEL-codes: G15 G24 G32 M40 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:39:y:2016:i:c:p:263-277

DOI: 10.1016/j.jcorpfin.2016.04.005

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