Can Deregulation Improve Analyst Informativeness? Evidence from the JOBS Act.

Abstract

We provide evidence that pre-IPO analyst communications are an important determinant of analyst behavior. Analysts permitted to increase pre-IPO communications with investors, bankers, and company management through the JOBS Act issue reports that are more biased, less accurate, and generate smaller market reactions. In addition, these reports are preceded by predictable abnormal returns that are increasing in the report’s optimistic bias, suggesting that pre-IPO analyst communications increase informed investors’ ability to anticipate report content. Moreover, the increased optimism appears rational from analysts’ and investment banks’ perspectives as pre-IPO communications increase the positive relation between analyst optimism and our proxy for post-IPO trading revenues. In sum, pre-IPO communications appear to result in analyst behavior that benefits preferred clients and the investment bank at the expense of other investors.