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

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.