Pre-IPO Hype by Affiliated Analysts: Motives and Consequences

We provide the first study of underwriter-affiliated analysts’ pre-IPO research coverage and its impact on stock prices. Using proprietary data on a sample of Chinese IPOs, we document that affiliated analysts make highly overoptimistic forecasts about IPO clients. Analyst hype inflates both the offer price and the postmarket price. Consistent with the sentiment theory, IPO investors are insensitive to analyst hype because the offer price is set sufficiently lower than the postmarket price. We utilize a regulatory change as a quasi-experiment to establish that pre-IPO analyst bias is due to intentional hype. Our analysis contributes to the debate about recent US regulatory changes on pre-IPO analyst coverage.