Three Studies on Firm-specific Information in the Early IPO Aftermarket

Abstract

This thesis consists of three stand-alone studies examining the emergence of firm-specific information in the early trading period after an initial public offering (IPO); that is, during the "IPO aftermarket". Information asymmetry between firm insiders and outside investors is severe in the early aftermarket. In this information environment, less-informed investors are potentially susceptible to biased information from the media, affiliated analysts, and firm management. This thesis is primarily concerned with identifying factors affecting the objectivity and usefulness of affiliated analysts' recommendations and management guidance, and the consequences for less-informed investors of the resulting information flows. The empirical analysis in this thesis is based on firms recently going public in the United States. The first study examines whether firm-specific news published during the post-IPO quiet period mitigates excess optimism in affiliated analysts' initial post-IPO recommendations. I find that affiliated analysts' initial recommendations are less optimistic for IPOs with greater news coverage, more positive news sentiment, and stronger news disagreement. These results are consistent with the contention that affiliated analysts have weaker incentives to optimistically bias their initial recommendations when investors pay greater attention to the issued stock, when investors hold a more positive view of the IPO firm's prospects, and when the market uncertainty of the issuing firm is abnormally high. The second study examines whether affiliated analysts' initial post-IPO recommendations help or hurt retail investors. I find that net retail purchases are positively related to the excess of affiliated analysts' buy-type over other recommendations on the first trading day after the expiration of the post-IPO quiet period. I also find that these resulting retail purchases are negatively related to the probability of issuing firms having good earnings news in the coming earnings announcement. These results are consistent with the conjecture that retail investors refer to affiliated analysts' initial recommendations to purchase the issued stock immediately following the expiry of the post-IPO quiet period. However, these retail purchases do not appear to be consistent with the firm's short-term earnings news. In addition, I document the role of news media in disseminating affiliated analysts' recommendations to retail investors, as manifested in a more pronounced relation between net retail purchases and affiliated analysts' first post-IPO recommendations when these recommendations were mentioned by at least one news article on the recommendation announcement date. The third study examines whether managers' anticipation of an early lock-up release (ELR) affects their propensity to initiate quarterly guidance soon after an IPO, and the direction and extent of any bias reflected in the initial guidance. I find that management's propensity to initiate guidance in the first 90 days post-IPO is greater when there is a subsequent ELR, especially when top executives are involved in the early sales of the issued stock. I also find that managers of ELR firms are more conservative in their initial guidance than are those of non-ELR firms. These results suggest that although ELRs to some extent relax lock-up restrictions, managers do not appear to employ their voluntary disclosures to intensify insiders' information advantage in the early IPO aftermarket. Show more