Are SEO investors misled by analyst optimism bias? Evidence from investor bids in SEO auctions

Abstract

Using unique seasoned equity offering (SEO) investor bid data in China, we examine the impact of analyst optimism bias on SEO investors’ bids and the subsequent SEO discount. After accounting for information asymmetry and analyst coverage, our findings suggest that SEO investor bid prices are positively correlated with analyst optimism bias, suggesting that SEO investors are misled. The higher SEO bid price translates into a lower SEO discount. Our findings are robust to alternative measures of earnings forecasts, additional control variables, and SEO discounts. Additional evidence suggests that, when institutional investor ownership is lower or an SEO firm is less transparent, the positive correlation is more prominent. At last, we find the long-run SEO performance is negatively correlated with the analyst optimism bias. Our findings imply that analysts play more than one role in SEO pricing. In addition to lowering information asymmetry, analysts also mislead SEO investors by providing optimistically biased earnings forecasts.