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A study of IPOs in the Nordic markets between 2007 and 2017 – Are underwriting analysts’ recommendations outperforming or suffering from overoptimism?

Ødegård, Ida-Elise; Thompson, Vilde
Master thesis
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URI
http://hdl.handle.net/11250/2578735
Date
2018
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  • Executive Master of Management [434]
Abstract
This thesis presents a study of the credibility on underwriting analysts’

recommendations issued on 100 initial public offerings (IPOs) in the Nordic

markets between 2007 and 2017. By following the methodology presented in a

study by Michaely and Womack (1999), we investigate four main hypotheses.

The first hypothesis investigates whether underwriting analysts issue biased

recommendations, this is referred to as the conflict of interest hypothesis. The

second hypothesis investigates whether underwriting analysts issue more

accurate recommendations as they benefit from superior information obtained in

the marketing and due diligence processes of the IPO, this is referred to as the

superior information hypothesis. The third hypothesis investigates whether

underwriting analysts attempt to boost stock prices of poor preforming IPOs.

The fourth hypothesis investigates whether the market discounts

recommendations issued by underwriting analysts immediately after the

announcement.

By investigating 274 buy recommendations in an event study, we find no

evidence that underwriting analysts issue biased recommendations. This indicate

no appearance of the potential conflict of interest in between investment banking

and the research department. Although we find that firms recommended by

underwriting analysts overall perform better, we cannot conclude that

underwriting analysts have superior information to others as the difference is not

significant. These findings conflict with the findings of Michaely and Womack

(1999). We present the implementation of new regulations and legislations in the

financial markets as one possible explanation to this. The analysis is extended to

test if there are characteristics that are more important for the performance of a

recommended IPO. We find some evidence for the conflict of interest hypothesis

on small sized IPOs. These results suggest that smaller IPOs, which is likely to

receive less analyst coverage, allow underwriter analysts to issue biased

recommendations. We find some evidence for the superior information

hypothesis for IPOs receiving six or more recommendations.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2018
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Handelshøyskolen BI

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