Sustainability of Analyst Recommendations in Multiple Lead Underwriter IPOs

Abstract

Recently, a new organizational form of syndicate—multiple lead underwriter (MLU) initial public offerings (IPOs)—has emerged in IPOs. In addition to the increased deal complexity, lead underwriters in MLU IPOs face a new competition between them after underwriter selection, which is not present in single lead underwriter (SLU) IPOs. It is therefore questionable whether recommendations by analysts from lead underwriters of the MLU IPOs are as sustainable as those of the SLU IPOs. We examine IPO recommendations to capture how this new syndicate structure affects analyst behavior in terms of analyst optimism and investment value. In contrast to the popular conflict of interest perspective, our findings point to the notion that the new syndicate structure suppresses bias in recommendations and that reputation upholding incentive dominates pressure from competition. MLU-affiliated analysts are not more optimistic and provide more informative research coverage whose informativeness, however, fades away shortly after the recommendation releases. Our findings overall indicate the existence of sustainability in the MLU IPO recommendations.