Underwriting relationships, analysts' earnings forecasts and investment recommendations

TLDR

We examine the effect of underwriting relationships on analysts' earnings forecasts and recommendations. Lead and co‑underwriter analysts issue more favorable growth forecasts and recommendations than unaffiliated analysts, yet their earnings forecasts are not higher; investors react similarly to strong buy/buy recommendations, but hold recommendations from lead underwriters produce significantly more negative short‑term returns, indicating lead analysts are more likely to recommend hold when a sell is warranted, while post‑announcement returns are comparable across affiliations.

Abstract

We examine the effect of underwriting relationships on analysts' earnings forecasts and recommendations. Lead and co-underwriter analysts' growth forecasts and recommendations are significantly more favorable than those made by unaffiliated analysts, although their earnings forecasts are not generally greater. Investors respond similarly to lead underwriter and unaffiliated `Strong buy' and `Buy' recommendations, but three-day returns to lead underwriter `Hold' recommendations are significantly more negative than those to unaffiliated `Hold' recommendations. The findings suggest investors expect lead analysts are more likely to recommend `Hold' when `Sell' is warranted. The post-announcement returns following affiliated and unaffiliated analysts' recommendations are not significantly different.