Do analyst's pre-issue recommendation create value? Empirical evidence from Indian IPO market

Abstract

This study investigates impact of pre-issue analysts coverage on IPO performance i.e. subscription rate, underpricing, volatility and liquidity. Using pre-issue analyst's recommendation for a sample of 157 IPOs issued in India during the period 2007–2012, we find that analysts’ recommendation reduce underpricing. Precisely, more analysts participated in issuing recommendation (including favorable recommendation) reduce underpricing. The result also shows that favorable recommendation issued by more number of participating analyst's boosts confidence of potential investors and hence probability of getting success for IPOs in terms of oversubscription is more. Further, affiliated analysts are associated with lesser oversubscription rate. Additionally, independent analyst's recommendation is inversely associated with underpricing. In support of IPO grading, which is a unique practice in India, we find that superior grading reduce underpricing and attract more response from investors. Further, evidence suggests that pre-issue analyst coverage increase oversubscription rate, while reduce listing day volatility and liquidity for IPO stocks.