HOW DO IPO ISSUERS PAY FOR ANALYST COVERAGE?

Michael T. Cliff and David J. Denis

This article reports evidence consistent with the view that initial public offering (IPO) issuers purchase high-quality analyst coverage with greater underpricing of the IPO. Specifically, we report that underpricing is positively related to analyst coverage by the lead underwriter and to the presence of an all-star analyst on the research staff of the lead underwriter. Moreover, if underwriters do not deliver the expected analyst coverage (conditional on the level of underpricing) IPO issuers are more likely to switch underwriters when they conduct a subsequent seasoned equity offer.