Do Initial Public Offering Firms Purchase Analyst Coverage with Underpricing?




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    • Michael T. Cliff is from Virginia Tech, Pamplin College of Business. David J. Denis is from Purdue University, Krannert School of Management. The authors gratefully acknowledge the contribution of Thomson Financial for providing earnings per share forecast data, available through the Institutional Brokers Estimate System. These data have been provided as a part of a broad academic program to encourage earnings expectations research. We thank Raj Aggarwal, Mike Cooper, Diane Denis, Rob Hansen, Greg Kadlec, Laurie Krigman, Alexander Ljungqvist, Tim Loughran, Michelle Lowry, John McConnell, Raghu Rau, Jay Ritter, Per Stromberg, an anonymous referee, and seminar participants at Concordia University, Michigan State University, the University of Pittsburgh, and the second Conference on Entrepreneurship, Venture Capital, and IPOs, for helpful comments. We also thank Laura Field and Jay Ritter for providing data, and Matt Barcaskey, Valeriy Sibilkov, and Mira Straska for research assistance.


We report that initial public offering (IPO) underpricing is positively related to analyst coverage by the lead underwriter and to the presence of an all-star analyst on the research staff of the lead underwriter. These findings are robust to controls for other determinants of underpricing and to controls for the endogeneity of underpricing and analyst coverage. In addition, we find that the probability of switching underwriters between IPO and seasoned equity offering is negatively related to the unexpected amount of post-IPO analyst coverage. These findings are consistent with the hypothesis that underpricing is, in part, compensation for expected post-IPO analyst coverage from highly ranked analysts.