Orphan versus non-orphan IPOs: the difference analyst coverage makes

Boissin, Romain (2012): Orphan versus non-orphan IPOs: the difference analyst coverage makes.

Abstract

This paper examines the long-run performance of US IPOs carried out between 1991 and 2010. By using various methodologies, we find that IPOs in our sample performed abnormally relative to comparison portfolios over the 1991-2010 horizon. This abnormal long-run performance is much severe for orphan IPOs (without financial recommendation) than non-orphan IPOs from three to five-year horizon (statistically significant). The evidence suggests that analyst coverage is indeed important to issuing firm but the market does not fully incorporate the perceived value of this coverage. Further analysis reveals that this outperformance by non-orphan stems from high coverage. Investors pay more attention to non-orphan when IPOs have a large underwriting syndicate and are high underpriced. The difference between orphan and non-orphan subsists in VC backed or non VC backed IPOs and whatever the ownership structure of the IPOs. We establish that analyst coverage is significantly related to long-run performance of IPOs.

• Item Type: MPRA Paper
• Language: English
• Keywords: IPOs, analyst coverage, long-run performance
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies

References

Aggarwal, R., L. Krigman, and K. Womack (2002), “Strategic IPO underpricing, information momentum, and lockup expiration selling”, Journal of financial economics, 66 (1), 106-137.

Barth, M., R. Kasznik and M. McNichols (2001), “Analyst coverage and intangible assets” Journal of accounting research, 39, 1-34.

Bhushan, R.. (1989), “Firm characteristics and analyst following”, Journal of Accounting and Economics, 11 (2-3), 255-274.

Barber, B., and J. Lyon.( 1997). Detecting long-run abnormal stock returns: the empirical power and specification of test statistics. Journal of financial economics, 43 (3), 341–372.

Boubaker, S. and F. Labégorre (2008), “Ownership structure, corporate governance and analyst following: a study of French listed firms”, Journal of banking and finance, 32 (6), 961-976.

Bradley, D., B. Jordan, and J. Ritter (2008a), “Analyst behavior following IPOs: the ‘bubble period’ evidence”, Review of financial studies, 21 (1), 101-133.

Bradley, D., K.Chan, J. Kim, and A. Singh (2008b), “Are there long-run implications of analysts’ coverage for IPOs?”, Journal of banking and finance, 32 (6), 1120-1132.

Bradley, D., K.Chan, J. Kim, and A. Singh (2004), “Investment bankers, their analysts and orphaned IPOs”, working paper.

Bradley, D., B. Jordan, and J. Ritter (2003), “The quiet period goes out with a bang”, Journal of finance, 58 (1), 1-36.

Brav, A. and P. Gompers (1997), “Myth or reality? The long-run performance of initial public offerings: evidence from venture and nonventure capital-backed companies”, Journal of finance, 52 (5), 1791-1821.

Chemmanur, T. and E. Loutskina (2006), “The role of venture capital backing in initial public offerings: certification, screening, or market power?, working paper, Boston college.

Chen, H., and J. Ritter (2000), “The seven percent solution”, Journal of finance, 55 (3), 1105-1131.

Cliff, M. And D. Denis (2004), “Do initial public offering firms purchase analysts’ coverage with underpricing?”, Journal of finance, 59 (6), 2871-2901.

Corwin, S., and P. Schultz (2005), “The role of IPO underwriting syndicates: pricing, information production, and underwriter competition”, Journal of finance, 60 (1), 443-486.

Das, S., R. Guo, and H. Zhang (2006), “Analysts’ selective coverage and subsequent performance of newly public firms”, Journal of finance, 61 (3), 1159-1185.

Ellis, K., R. Michaely and M. O’Hara (2005), “Competition in investment banking: proactive, reactive, or retaliatory?, working paper, University of California.

Fama, E. and K. French (1992), “The cross-section of expected stock returns”, Journal of finance, 47 (2), 427-65.

Fama, E. and K. French (1993), “Common risk factors in the returns on stocks and bonds”, Journal of financial economics, 33 (1), 3-56.

Fama, E., and K. French (1996), “Multifactor explanations of asset pricing anomalies”, Journal of finance, 51 (1), 55-84.

Gompers, P. and J. Lerner (1997), “Venture capital and the creation of public companies: do venture capitalists really bring more than money?”, Journal of private equity,1 (1), 15-30.

Hoberg, G. and H. Seyhun (2009), “Do underwriters collaborate with venture capitalists in IPOs? Implications and evidence”, working paper, University of Maryland.

James, C. and J. Karceski (2006), “Strength of analyst coverage following IPOs”, Journal of financial economics, 82 (1), 1-34.

Jain, B., and O.Kini (2000), “Does the presence of venture capitalists improve the survival profile of IPO firms?”, Journal of business finance and accounting, 27 (9-10), 1139-1176.

Khorana, A., S. Mola and P. Rau (2009), “Is there life after loss of analyst coverage?”, working paper, Purdue University.

Krigman, L., W. Shaw, and K. Womack (2001), “Why do firms switch underwriters?”, Journal of financial economics, 60 (2-3), 245-284.

Lang, M., K. Lins and D. Miller (2004), “Concentrated control, analyst following, and valuation: do analysts matter most when investors are protected least?”, Journal of accounting research, 42 (3), 589-623.

Loughran, T., and J. Ritter (2004), Why has IPO underpricing changed over time?”, Financial management, 33 (3), 5-37.

Lyon, J., B. Barber and C. Tsai (1999), “Improved methods for tests of long-run abnormal stock returns”, Journal of finance, 54 (1), 165-201. O’Brien, P. and R. Bhushan (1990), “Analyst following and institutional ownership”, Journal of accounting research, 28, 55-76.

Rajan, R., and H. Servaes (1997), “Analyst following of initial public offerings”, Journal of finance, 52 (2), 507-529.

Ritter, J. and I. Welch (2002), “A review of IPO activity, pricing and allocations”, Journal of finance, 57 (4), 1795-1828.