Asian Review of Financial Research Vol.36 No.4 pp.151-177 https://www.doi.org/10.37197/ARFR.2023.36.4.4
Publication of Analyst Reports around the IPO Date and the Stock Market's Response
Key Words : Initial public offering,Quiet period,Analyst report,IPO underpricing,Stock return
Analysts process various information about firms to provide market participants with earnings forecasts and recommendations. There are both positive and negative views on the usefulness of analyst reports and investment recommendations. Liu et al. (1990) argue that analysts' stock recommendations are valuable as investment information, as they find that stocks recommended as "buy" by analysts tend to yield positive excess returns, while stocks recommended as "sell" tend to yield negative excess returns. However, according to studies by Bhushan (1989), Irvine (2000), Brown et al. (2015), analysts face conflicts of interest such as the incentive to increase commissions for their affiliated brokerage firms or maintain close relationships with the management of companies. Due to these conflicts of interest, they suggest that the analysts' recommendations are biased information. Accordingly, analysts can play a role in enhancing market efficiency by providing reports with high-quality information that helps reduce misvaluation of stock prices. However, due to economic conflicts of interest, the possibility remains that analysts might overestimate companies for personal gain, potentially misleading investors and increasing the misvaluation. IPO (Initial Public Offering) underpricing refers to the phenomenon where the offer price of newly issued shares is set lower than their fair value, resulting in the shares being underpriced. As a consequence, the stock price rises significantly higher than the offer price in the aftermarket, leading to substantial initial returns. Previous studies report that IPO stocks tend to exhibit abnormally high initial returns but experience lower returns in the long term (Ritter, 1991; Loughran and Ritter, 1995; Kim and Lee, 2012; Kim, 2016). In the U.S. stock market, a ‘quiet period' is applied for firms preparing for IPO to protect investors (Bradley et al., 2003; Jia et al., 2019). IPO firms might have incentives to inflate future business prospects and earnings forecasts to obtain a higher valuation for their offer price. The U.S. Securities and Exchange Commission (SEC) has established the quiet period around the IPO date to prevent companies from providing predictive information related to firm valuation, such as sales, operating income, net income, that could influence the offer price and stock price. Unlike the U.S., the Korean stock market does not impose a quiet period on firms gearing up for an IPO. Consequently, it is possible to analyze the effect of analyst reports around the IPO date on stock returns using the Korean data. This study investigates the short-term and long-term returns of firms which analysts cover from the time of their IPOs compared to those that did not, among the newly listed firms on the Korea Stock Exchange during the period from 2010 to 2020. This research empirically examines whether the release of analysts' reports for IPO firms play a role of providing useful information or playing a role of hype. We find that newly listed firms in the KOSPI (Korean Composite Stock Price Index) with analysts' coverage tend to earn lower initial returns. And there is no significant relation between analyst coverage and initial returns for newly listed firms in the KOSDAQ (Korea Securities Dealers Automated Quotation). Furthermore, the release of analyst reports is also positively related to one-year excess returns over the industry benchmark. The results suggest that analyst coverage for IPO firms in the Korean stock market play positive roles of improving market efficiency by delivering useful information to market participants and reducing information asymmetry.