Analyst Following of Initial Public Offerings




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    • Rajan is from the University of Chicago and Servaes is from the University of North Carolina at Chapel Hill. Part of this research was completed when Servaes was visiting London Business School. Some of the results reported in this article were contained in a previous version of a related working paper: “The Effect of Market Conditions on Initial Public Offerings” (March 1994). We thank Mike Cooper, David Denis, Jennifer Francis, Joshua Lerner, Ernst Maug, Peter Pope, René Stulz, Sunil Wahal, Marc Zenner, an anonymous referee, and seminar participants at INSEAD, Katholieke Universiteit Leuven, London Business School, North Carolina State University, Norwegian School of Management, Stockholm School of Economics, University of Lausanne, and the University of North Carolina at Chapel Hill for helpful comments and suggestions and Jay Ritter and Michel Vetsuypens for allowing us to use their databases. IBES kindly allowed the use of their data on analyst following. This research was partially supported by the McColl Faculty Fellowship (Servaes), and NSF grant SBR 9423645 (Rajan).


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-documented 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.