The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act

Do the Burdens to Being Public Affect the Investment and Innovation of Newly Public Firms?

“…This contrasts with the other provisions of the JOBS Act, which relate only to the process of going public. Specifically, other JOBS Act provisions allow EGCs to confidentially file their IPO prospectus with the SEC, have analysts more involved IPO process (Dambra, Field, Gustafson, and Pisciotta 2018), and privately market the offering to qualified investors before the IPO prospectus is made public. Since the IPO prospectus is ultimately made public at least 21 days before a firm goes public, this is unlikely to have a persistent effect on corporate policy.…”

“…Therefore, our empirical strategy, which compares the effect of the JOBS Act on investment between SRC-eligible and SRC-ineligible firms (i.e. all EGCs), will not capture the effect of this particular provision.12 For instance,Dambra, Field, Gustafson, Pisciotta (2018) find that although having analysts more involved in the IPO process changes analyst behavior (analysts become more optimistic), this change in affiliated analyst behavior is short-lived (i.e., for coverage initiations) and thus unlikely to affect long-run firm outcomes.…”

Preparers and the financial reporting system

“…Another provision of the JOBS Act allows greater analyst involvement in initial public offerings. Dambra et al (2018) find that affected analysts issue more optimistically biased coverage to the benefit of the issuers, analysts, and investment banks, but to the detriment of investors. Combined, the evidence points to the JOBS Act increasing initial public offerings, as intended, but also increasing information uncertainty and the associated costs of that uncertainty.…”

Investor relations and IPO performance

“…UWs reportedly apply many selfish (hyping) strategies that, in one form or another, involve distorted first-day returns. Some of those strategies include IPO spinning (Loughran and Ritter, 2004;Liu and Ritter, 2010), laddering (Hao, 2007), favorable analyst coverage (Cliff and Denis, 2004;Dambra et al, 2018;Jia et al, 2018;Qian et al, 2018), and exchanging soft-dollar commission business in return for IPO allocation (Reuter, 2006). Thus, it is likely that some UWs could exploit the IR strategies for ulterior motives.…”

“…The evidence in prior sections suggests that some IR strategies aim to hype investor expectations about future fundamentals of the IR-backed IPOs. Since some investors tend to naively rely on optimistically biased analysts' forecasts made around the equity issuance events (Dechow et al, 2000;Dambra et al, 2018), we use the degree of analysts' over-optimism as a proxy of how high are the expectations of investors about firm fundamentals around the IPO event. Specifically, using I/B/E/S database, we calculate analysts' earnings forecast error (AFE) using the methodology in Huyghebaert and Xu (2016) 2018) study requires that the analysts' forecasts to be released in the 180 days following the IPO date.…”