Brokerage House Initial Public Offerings and Analyst Forecast Quality

Abstract

We examine how brokerage firm initial public offerings (IPOs) influence the research quality of sell-side analysts employed by the brokerage. Our main results focus on earnings forecast bias and absolute forecast errors as proxies for research quality. Using a staggered difference-in-differences analysis, we document significant decreases in forecast bias and absolute forecast error during the two-year period centered on the analysts’ brokerage house IPO. In additional analyses, we explore several potential explanations for the short-term benefits of brokerage house IPOs. We find some evidence that IPOs delay the departure of more talented analysts and that the effects are more concentrated among analysts and brokers that face more scrutiny. This paper was accepted by Brian Bushee, accounting. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2022.4610 .