Analysts are major information mediators in capital market who always engage in prediction of future share prices of an organization. Analysts predict the future price of an IPO based on their experience of capital market and analysis of external factors. However, many argue that if analysts are affiliated with investment banks of the companies they follow their research may be less useful (FINRA Guide to Understanding Securities Analyst Recommendations. 2013). The key aim of this study is to denitrify how analyst ranking and affiliation affects the performance of stock recommendations for IPOs. This paper will systematically investigate whether analysts’ ranking and affiliation affects the market response to their stock reconditions in the recent IPO setting, over the period of past three years.
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The Aim of this research is to evaluate the impacts of analyst ranking and affiliation the performance of stock recommendations for IPOs. The other objectives of the study are as follows:
This research is an attempt to evaluate the “impacts of analyst ranking and affiliation on the performance of stock recommendations for IPOs”. In order to gain required knowledge about the study I have gone through several books, journals and online articles regarding link between analyst affiliations and their recommendations about IPOs. This part is going to present brief outline of all those academic work.
This study is based on the assessment of contemporaneous relation between recommendation profitability and earnings forecast accuracy to assess the effectiveness which is used by analysts to translate their forecasts into profitable recommendations. Through the analysis it is found that after controlling for proficiency, more correct analysts make more profitable recommendations, although only for firms with value-relevant earnings. Moreover, this study found that relation between accuracy and profitability is affected due to the conflicts of interest from investment banking activities. Only for the non-conflicted analysts more accurate forecasts are associated with more profitable recommendations in case of buy recommendations. Hold recommendations are treated as sells for conflicted analysis when higher levels of accuracy are associated with higher level of profitability. Finally, this research found that the relation between accuracy and profitability appeared by regulatory reforms aimed at mitigating analyst conflicts of interest.
This study is based on analysis of whether conflicts of interest with brokerage and investment banking encourage sell side analysts to issue favorable recommendations and if it is so, then whether investors are misinform by such biases. Researchers used qualitative measures from a novel data set and found that there is a positive relationship between recommendations and conflict magnitudes. Darting the late 1990s stock market bubble the favorable biases stemming from investment banking conflict was especially marked. It is suggested by the evidence form upgrades and downgrades response of stock prices and trading volumes that analyst conflicts are recognized by market and their opinions are properly discounts. Even during the bubble period this pattern continues. The findings of this research do not support the view about conflicted analysts that investors can be systematically misguided by the optimistic stock recommendations.
Due to the expansion of stock market participation from Wall Street to Main Street the investment information has exploded. In current scenario the investment decisions of people are vastly based on stock analyst reports received through TV financial news, newspapers, business magazines, corporate filings and news releases, Internet Web sites and chat rooms, etc. But in real word the quantity is no guarantee of quality and thus, small investors always face problem as which information they should rely upon in making investment decisions (Ertimur, Sunder, and Sunder, 2006).
And that is the reason why most of the investors are depended too heavily on the one-word recommendations provided by a few particular analysts without knowing circumstance in which these recommendations are generated (Stickel, 1992). There are several factors that affect these recommendations, along with this, they way of reading such recommendations can also affect the final decision especially when the recommendations are about investment in IPO’s.
Through initial public offering the company asks for money from public probably to raise expansion capital by issuing its shares for very first time (Gailen and Owers, 1983). As the shares are being issued for first time making any predication about future returns is not easy. The fluctuation in prices is common as the private company transformed into public through these IPO and new in security market (Chambers, 2010). For example a Coca-Cola issued its IPOs at the rate of $40 per share in 1919. During following year the price of share crashed to $19 but now that one share with dividends reinvested, is worth over $5 million. So basically making the prediction about future price of IPOs is not easy as there is no data to evaluate past performance of the company (Oliver and Robert, 1991).
Analysts are the key sources of information for investors. Most of the investment decisions are based on the recommendations provided by analysts about the performance of IPOs (Brown and Jerold, 1985). But the accuracy of their recommendations is always a hot topic for researchers. There is a conflict about the accuracy level of recommendations about performance of IPOs provided by analysts as people make huge investment on the basis of these predictions.
Analysis are ranked on the performance of stocks about they provided recommendations. The favorable performance of stock can improve their ranking and similarly less accurate recommendations can decrease it too (Harrison and Marcin, 2010).
On the other hand analyst affiliation also affects their recommendations about performance of stock due to bias. The stock recommendations of an analyst can receive different market reaction when it is announced if the underwriter analyst is under pressures to promote an IPO (Mikhail, Walther and Wills, 1999). Their unfavorable recommendations will receive more negative reaction and on the other hand favorable recommendations will less positive reaction (Loughran and Ritter, 2004). The analysts can be under more pressure as the lead underwriters revive most of their profit from IPO deals (Chen and Matsumoto, 2006).
Co-underwriters are part of the underwriting syndicate too so the analysts who are working for them may also be subject to promoting pressure (Richard and Manaster, 1990). As defined in key literatures there are several more factors that can affect the recommendations of analyst about performance of IPOs.
In order to carry out the study in a proper manner it is must to select a framework of methods, procedures and postulates. Research methods is the part of study that facilitates such framework which vastly contributes in process of data collection and analysis.
This present research will be undertaken by using case study approach. The intention behind using this approach is answering the current research problem by careful examination of events within the real life context (Gardner, 2004). This approach will facilitate the establishment of valid and reliable evidence.
Research design can be stated as a detailed outline that will be used to direct the research study towards its objectives. The nature of the research and subject under study determines the selection of research design. Typically, there are three different research designs which can be used for any research work based on its nature. These designs are casual, exploratory and descriptive (Seymour, 2001). This present research will be based on the exploratory research design as it is amount exploring the facts about stock exchange practices.Research Design
Several methods of data collection can be used in case study research approach. However, in the present research, all secondary sources will be used for collection of information. Published journals will be the major source of information but along with this, books and other documents regarding stock exchange activities and analyst involvement will be used (Loughran and Ritter, 2004). A set of Analyst recommendations in last several years will be collected and analyzed with their performance.
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