Analyst Following of Initial Public Offerings

  • Author(s): RAGHURAM RAJAN, HENRI SERVAES
  • Published: Apr 18, 2012
  • Pages: 507-529
  • DOI: 10.1111/j.1540-6261.1997.tb04811.x

ABSTRACT

We examine data on analyst following for a sample of initial public offerings completed between 1975 and 1987 to see how they relate to three well‚Äźdocumented IPO anomalies. We find that higher underpricing leads to increased analyst following. Analysts are overoptimistic about the earnings potential and long term growth prospects of recent IPOs. More firms complete IPOs when analysts are particularly optimistic about the growth prospects of recent IPOs. In the long run, IPOs have better stock performance when analysts ascribe low growth potential rather than high growth potential. These results suggest that the anomalies may be partially driven by overoptimism.

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