Bias in Underwriter Analyst Recommendations: Does it Matter?

Abstract

Underwriter analysts issue recommendations that are on average more favorable than recommendations of other analysts. In this paper, I ask whether this bias matters for returns, and whether it matters for wealth redistribution between institutional and individual investors. I find that underwriter 'Strong Buy' recommendations for IPOs exhibit inferior performance. For other positive recommendations - 'Buys' for IPOs, and 'Strong Buys' and 'Buys' for SEOs - there are no significant differences between affiliated and unaffiliated analysts. Institutional reaction to analyst recommendations is broadly consistent with these results. For IPOs, institutions increase their holdings only in response to unaffiliated recommendations. For SEOs, the response to underwriter recommendations is actually somewhat stronger than to non-underwriter recommendations. In addition, there is little evidence that individual investors as a class incur losses by following the 'Strong Buy' recommendations issued by IPO underwriters.