But they did see a greater frequency of favorable recommendations for firms generating the largest fees, suggesting a certain self-interest on the part of the analysts. Investors may eventually sense a bias. They place less weight on the forecasts of underwriter analysts in the post-offering period, Lin and McNichols found. In a second paper, still to be published, McNichols and Lin examine analysts' relationships to firms that have recently gone public. It's very interesting that, given the more biased reports, there are so few unaffiliated analysts out there to counteract the affiliated analysts.
Affiliated analysts are also more likely to cover overpriced stocks than are unaffiliated analysts.
One anomaly is that when a firm goes public, there's a stock price jump of about 16 percent in the first day. We've found in our sample that the offerings that have only affiliated coverage or no coverage at all underperform the market by about 20 percent in the first year. IPOs for which there is the greatest independent coverage tend to do better, underperforming on average by about 7 percent. A third paper will consider that question. Financial analysts play a central role in the processing and interpretation of financial statement information.