Research Reports on Initial Public Offerings (IPOs): Analysis of Target Stock Price Accuracy

Abstract

Abstract. Research Reports on Initial Public Offerings (IPOs) offer analysts with unique challenges. There is little, if any, financial background on the corporation and these Reports can be very influential as the company goes public for the first time. We examined 692 Research Reports issued on nearly 200 IPO's during 2013 and found their Target Stock Price (TSP) accuracy to be very respectable when compared to Reports issued on mature companies. We looked at IPO Reports issued by at least one analyst with a Chartered Financial Analyst (CFA ® ) designation. These results showed a slightly higher, accuracy rate than reports issued by non-CFA analyst(s). Finally, we ranked twelve securities firms on their TSP accuracy rates. Keywords:Initial public offerings; research reports IntroductionResearch Reports are an important product produced by many firms in the securities business. They are written on corporations as old as General Electric founded in 1892, and on new companies going public for the first time in an Initial Public Offering (IPO) such as Snap, Inc., in 2017 (NYSE: SNAP). This article focuses on the latter as we wanted to look at the Target Stock Price (TSP) accuracy of what we view as probably the toughest Research Report to write, a corporation with basically no previous track record on the valuation or the performance of its stock price. The TSP is important because it leads to a Buy, Sell, or Hold recommendation when compared to the current stock price. This article begins with a review of the literature on the topic of TSP or Analyst Accuracy. It is important to immediately note that we found no such prior research exists on testing such accuracy with Research Reports on IPOs. The article then turns to the methodology and database, reports results, and presents our conclusions on what we believe to be the first research of its kind on Research Reports and IPOs. Review of Recent ResearchWe thought regular analysis on the accuracy of Research Reports would be quite plentiful. We were mistaken. After all, such Reports are making very specific recommendations (e.g., Buy, Sell, Hold) and normally provide a specific TSP. The TSP tells the investor how much of an annual gain can be expected in the stock price. If the current stock price is $40 per share and the TSP is $50 within twelve months (the normal timeframe in Research Reports), then the annual expected gain would be 25%. This percentage would be compared against alternative investments at the same and different levels of risk. Moreover, investors often compare the expected TSP gain against the expected gain using an index (passive) strategy such as investing in the S&P 500 over the same period. Research Reports are a form of active investing advice because if the predicted returns are less than what the investor expects from the S&P 500, then the investor would likely purchase an index fund to gain the higher return, plus achieve immediate diversification of risk. Some research mainly focused on accuracy of earnings estimates which is not the sa...