Analysts’ Advice on IPOs and Regulations: An Analysis of US and European Markets
Using recommendations and target prices issued for initial public offerings (IPOs), we examine the impact of regulations in the US and European Union (EU) markets that were aimed at curbing conflicts of interest in sell-side research. Conflicted sell-side analysts, proxied by whether their brokerage houses acted as lead or co-managers in the IPO process, issue more optimistic recommendations in the pre-regulatory period both in the US and EU markets, but this extra optimism is absent after the adoption of regulations. A similar pattern emerges when looking at target prices for US IPOs: the expected return implied by these prices is higher for lead and co-managers in the pre-regulatory period, but the differential pattern disappears in the post-regulatory period. Investors seem to capture the pattern, as they tended to discount optimistic recommendations from conflicted analysis before, but not after, the adoption of regulations. We also report that US brokers take the new modus operandi to Europe: in the time between the passage of US regulations and EU regulations, US brokers in the lead role act in Europe similarly to the way they started acting in US.allowing us to understand the causal effects of proximity on fund investment decisions and performance. We find that a fund invests significantly more in firms that become more proximate due to the introduction of direct flights that reduces the fund’s cost of traveling to the firm, and that these more proximate investments exhibit superior performance. Our findings are robust to the inclusion of a variety of fixed effects and specifications that control for potential confounders such as firm-level shocks, fund-level shocks, and time trends. Collectively, our results indicate that proximity enhances investors' ability to acquire value-relevant information about firms.