Look who is talking now: analyst recommendations and internet IPOs

This paper investigates whether analyst recommendations are independent of their employer’s investment banking activities. Our sample consists of internet firms that went public during 1997-2000. The contribution of the paper to the literature is threefold. First, to account for missing recommendations in individual databases we have merged two databases with analyst recommendations. Second, we have exploited the short lives of internet IPOs by examining recommendations shortly before a firm’s delisting. Third, we have looked at stock returns after strong-buy recommendations. Based on regression analysis, significant differences are found between recommendations made by affiliated and unaffiliated analysts. Different results are obtained for initiations and reiterations. Furthermore, the recommendations from affiliated analysts appear to be more favorable than those from unaffiliated analysts before an IPO firm’s delisting. These findings support the conflicts of interest, but not the superior-information hypothesis for investment banks that have an underwriting mandate for the IPO firm.

Keywords: analyst recommendations, internet firms, initial public offerings
JEL codes: G14, M40