Underwriting Relationships and Analysts' Earnings Forecasts and Investment Recommendations
Abstract (Via Hsiou-wei Lin & Maureen F. McNichols @ SSRN )
This paper examines the effect of underwriting relationships on analysts’ earnings forecasts and recommendations. We find that lead and co-underwriter analysts’ recommendations are more favorable than those of unaffiliated analysts although their earnings forecasts are not significantly different. We also find that previously affiliated analysts who are not chosen to participate in a subsequent equity offering have issued recommendations comparable to unaffiliated analysts, and significantly less favorable than lead underwriter analysts. Our evidence suggests that issuing companies select the investment banks whose analysts have more favorable views, and is inconsistent with previously affiliated analysts issuing more favorable recommendations to curry favor with management. We find that investors earn similar returns by following lead and unaffiliated analysts’ strong buy and buy recommendations, but that more negative returns are associated with lead hold than unaffiliated hold recommendations. This evidence indicates that overoptimism by affiliated analysts, whether due to selection bias or strategic bias, appears to be confined to analysts’ hold recommendations.