Autumn 2018 Buffalo Business 21
Investors lose, insiders win when
IPOs involve analysts
When equity analysts
are more involved in a firm's
initial public offering (IPO),
investors who purchase
stock based on these ana-
lysts' reports lose more than
3 percent of their invest-
ment, according to a School
of Management study.
Published in the Journal of Accounting
and Economics, the study found that infor-
mation from these reports is more opti-
mistic, less informative and less accurate,
resulting in losses for investors but bene-
fiting investment banks, analysts and firms
through boosted share trading and pricing.
Equity analysts break down investment op-
portunities company by company to try to
pinpoint the investment potential of each.
"In the early 2000s, government reg-
ulation removed equity analysts from the
IPO process because they were accused of
biasing their research to generate more
business for banks," says Michael Dambra,
assistant professor of accounting and law.
"But the JOBS Act reintegrated these ana-
lysts back into the process in 2012, result-
ing in this less accurate information that
benefits industry insiders."
The authors analyzed more than 1,000
IPOs from 2004-14 to investigate how the
increased IPO involvement afforded by the
Jumpstart Our Business Startups ( JOBS)
Act has affected analyst behavior. They say
any deregulation designed to further in-
tegrate analysts into the IPO process may
have adverse, unintended consequences.
"If the government continues to repeal
regulations that prevent putting analysts
in compromising situations, we may see
more overly optimistic research that fur-
ther tilts the playing field in favor of large
institutional investors," says Dambra.
Dambra collaborated on the study with
Laura Casares Field, professor of finance,
University of Delaware Alfred Lerner
College of Business; Matthew Gustafson,
assistant professor of finance, Penn State
Smeal College of Business; and Kevin
Pisciotta, assistant professor of finance,
University of Kansas School of Business. x
Dambra
