The IPO quiet period and analyst recommendations

In a sample of all "ordinary" IPOs from 1996 to 1998, I document the average firm experiences a 2.01 percent abnormal return around the twenty-fifth calendar day after going public when the "quiet period" expires. This result is driven by analyst recommendations. Over one-half of my sample has a favorable recommendation issued by an investment bank affiliated with the newly-public firm resulting in an abnormal return of 3.31 percent compared to .48 percent for those firms that do not have coverage.;I find no evidence in support of the conflict of interest hypothesis, which suggests that lead underwriter recommendations will be discounted relative to non-lead underwriters because lead analyst recommendations are positively biased given the relationship that exists between the investment bank and the client. In fact, my results are more supportive of the superior information hypothesis, which posits that lead recommendations will be associated with larger abnormal returns compared to non-lead recommendations because lead underwriters gain valuable private information during the due diligence process making them better able to depict the true value of the firm.;I also find evidence in support of the confirmation hypothesis, which suggests the market will have greater confidence in recommendations given by more than one investment bank. Firms with multiple initiations are associated with significantly larger abnormal returns compared to those with single coverage.;Further, I show firm characteristics known to market participants can be used to predict analyst coverage at the end of the quiet period. Firms that have venture capital backing, a high-tech orientation, lower levels of underpricing, a greater degree of trading volume, lower levels of risk, and a greater number of managers involved in the IPO syndicate are more likely to have analyst coverage.;Although my results suggest a potential market inefficiency problem, a profitable trading opportunity is not likely once transaction costs are introduced. However, I do find an interesting anomaly. Based on publicly available information, firms that are most likely to have analyst coverage initiated elicit the largest abnormal returns.