Pre-IPO Meetings and Analyst Consensus Building

Abstract

We examine whether the consensus among affiliated analysts covering IPO firms changes after the 2012 Jumpstart Our Business Startups (JOBS) Act. The JOBS Act allows only affiliated analysts to attend pre-IPO meetings with managers of IPO firms that qualify as an Emerging Growth Company (EGC). Much of the information from these meetings is likely to be verbal and non-verbal cues from managers. While verbal and non-verbal cues contain value-relevant information, it is not clear how their high degree of subjectivity affects analyst consensus building. Using a sample of 660 IPOs during 2004-2016, we find that the dispersion of affiliated analysts’ initiation forecasts is significantly higher and is associated with larger post-IPO return volatility for EGCs than for similar IPOs prior to the JOBS Act. These findings do not extend to unaffiliated analysts covering EGCs. Further analysis suggests that variation in social connections may contribute to the higher dispersion among affiliated analysts after the JOBS Act. Our findings indicate that having privileged access to EGC management through pre-IPO meetings allows affiliated analysts to form highly subjective assessments, which may have the unintended consequence of contributing to increased information uncertainty for EGCs.