That Ship Has Sailed: Unaffiliated Analysts' Recommendation Performance for IPO Firms

Abstract

We examine whether unaffiliated financial analysts' Buy recommendations after IPOs earn higher returns than those of affiliated analysts during the 1994-2001 time period, when analysts working at investment banks are alleged to have been influenced by conflicts of interest. We extend the work of Michaely and Womack (1999), who studied 1990-1991 IPOs. While we confirm their result that investors tend to discount the recommendations of affiliated analysts, we do not find unaffiliated analyst recommendations earning higher abnormal buy-and-hold returns than recommendations from affiliated analyst at intervals of three, six or twelve months after the recommendation. Rather, our results show that the results vary considerably from year to year, with no evident time trend. Overall, we find that affiliated recommendations do not discriminate between good and bad IPO stocks, but unaffiliated recommendations generally arrive too late to provide useful trading advice.

Keywords: financial analysts, investment banking, recommendations, stock performance, conflict of interest

JEL Classification: G14, G24, G29