Essays on irrational pricing and analyst coverage of newly public companies

In the past decade, newly public companies experienced significant stock price increases prior to expirations of their SEC-mandated quiet periods. In a sample of 1993–2000 initial public offerings, the average cumulative abnormal return reaches 3.5%. The finding is statistically significant. The run-up is more pronounced for IPOs underwritten by prestigious underwriters and tends to increase with high first day return. IPOs that fell below their offering prices within first days of trading, on average, experience significant price appreciation at the end of their quiet periods. Very little information is typically released during the quiet period, and those pieces of information that indirectly reach market participants through trading should not be forecastable. The finding of the abnormal returns associated with the predetermined events is inconsistent with the rational investor behavior.; Numerous trading restrictions limit arbitrage opportunities during the quiet period. As a result, the abnormally high returns prior to coverage initiation has persisted for the past decade. The phenomenon started to appear after 1992 and reached its peak during the recent Internet IPO bubble. It was accompanied by a surge in underwriters' research coverage activity. The quiet-period run-up is shown to be driven by irrationally optimistic expectations of analyst recommendations.; First analyst reports for IPOs are shown to be overoptimistic on average but informative about the future relative performance of IPOs. The absence of abnormal returns at coverage initiation suggests that, by the time a report is disclosed, the market had already absorbed its content. The pre-coverage returns depend on the price targets disclosed later at the coverage initiation. The IPO market price gradually adjusts in the direction of the target price over the quiet period.