Analyst Selective Coverage in the Presence of IPO Management Forecasts

Abstract

This paper examines the initiation of analyst coverage of IPO firms in the presence of management forecasts. For a sample of 763 Australian IPOs from 1992 to 2004, we find firms that provide a management forecast in the prospectus are more likely to receive analyst coverage, after correcting for an endogeneity in the relationship. The depth of the coverage, measured by the number of analysts following the firm, is also greater for these firms. While forecast disclosure is irrelevant to the timing decision, underwriter affiliation is significantly associated with earlier and more positive recommendations. Management forecast disclosure is more important to the selective coverage decision of lower than higher quality analysts. Further tests show that analysts have superior predictive abilities and selectively initiate coverage for firms about which their true expectations are favorable, beyond the management forecast regime.

Keywords: Analysts' Selective Coverage, Management Forecast Disclosure, IPOs

JEL Classification: G15, G24, G32, M40