Analyst ranking, affiliation, and the market reaction to stock recommendations for IPOs

This paper studies the association between financial analysts' affiliation and the market reaction to their stock recommendations for IPOs, conditional on analyst ranking (All-American (AA) analysts or not). The sample includes 7,354 stock recommendations issued in the first year for 1,666 IPOs in the period 1996--2000. The major findings are as follows. First, the market reaction is less positive (more negative) for lead underwriter and co-underwriter analysts' favorable (unfavorable) recommendations than for those of unaffiliated analysts. Second, there does not seem to be significant differences between AA and non-AA analysts in terms of the impact of affiliation (lead underwriter or co-underwriter). Third, intraday analyses suggest that the market reacts quickly to information about analysts' affiliation. Lastly, long run abnormal returns after recommendations are not associated with analysts' affiliation. Overall, these findings suggest that the market rationally adjusts for positive biases in affiliated analysts' stock recommendations when recommendations are announced.