Underwriting Relationships, Analysts' Earnings Forecasts and Investment Recommendations

Underwriting Relationships, Analysts' Earnings Forecasts and Investment Recommendations

By
Maureen McNichols, Hsiou-wei Lina
Journal of Accounting and Economics. February
26, 1998, Vol. 25, Issue 1, Pages 101-127

We examine the effect of underwriting relationships on analysts’ earnings forecasts and recommendations. Lead and co-underwriter analysts’ growth forecasts and recommendations are significantly more favorable than those made by unaffiliated analysts, although their earnings forecasts are not generally greater. Investors respond similarly to lead underwriter and unaffiliated `Strong buy’ and `Buy’ recommendations, but three-day returns to lead underwriter `Hold’ recommendations are significantly more negative than those to unaffiliated `Hold’ recommendations. The findings suggest investors expect lead analysts are more likely to recommend `Hold’ when `Sell’ is warranted. The post-announcement returns following affiliated and unaffiliated analysts’ recommendations are not significantly different.