UB: Investors lose, insiders win when
IPOs involve analysts
February 2, 2018
equity analysts are more involved in a firm's initial public offering,
investors who purchase stock based on these analysts' reports lose more
than 3 percent of their investment, according to a new study from the
University at Buffalo School of Management.
Forthcoming in the Journal of Accounting and Economics, the study found
that information from these reports is more optimistic, less informative
and less accurate, resulting in losses for investors but benefiting
investment banks, analysts and firms through boosted share trading and
pricing. Equity analysts break investment opportunities down company by
company to try to pinpoint the investment potential of each.
"In the early 2000s, government regulation removed equity analysts from
the IPO process because they were accused of biasing their research to
generate more business for banks," says study co-author Michael Dambra,
PhD, assistant professor of accounting and law in the UB School of
Management. "But the JOBS Act reintegrated these analysts back into the
process in 2012, resulting in this less accurate information that
benefits industry insiders."
The authors analyzed more than 1,000 IPOs from 2004 through 2014 to
investigate how the increased IPO involvement afforded by the Jumpstart
Our Business Startups (JOBS) Act has affected analyst behavior. They say
that any deregulation designed to further integrate analysts into the
IPO process may have adverse, unintended consequences.
"If these JOBS Act provisions are extended, we may see more overly
optimistic research that further tilts the playing field in favor of
large institutional investors," says Dambra.
collaborated on the study with Laura Casares Field, PhD, professor of
finance in the University of Delaware Alfred Lerner College of Business;
Matthew Gustafson, PhD, assistant professor of finance in the Penn State
Smeal College of Business; and Kevin Pisciotta, PhD, assistant professor
of finance at the University of Kansas School of Business.
The UB School of Management is recognized for its emphasis on real-world
learning, community and economic impact, and the global perspective of
its faculty, students and alumni. The school also has been ranked by
Bloomberg Businessweek, Forbes and U.S. News & World Report for the
quality of its programs and the return on investment it provides its