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Previous research finds some evidence that analysts affiliated with equity underwriters issue more optimistic
earnings growth forecasts and optimistic recommendations of client stock than unaffiliated analysts. Unfortunately,
these studies are unable to discriminate between three competing hypotheses for the apparent optimism. Under the
bribery hypothesis, underwriting clients, with the promise of underwriting fees, coax analysts to compromise their
objectivity. The execution-related conflict of hypothesis postulates that the investment banks employing analysts
who are more bullish on a particular stock are better able to execute the deal, and so the banks pressure their
analysts to be bullish in order to enhance their execution ability. Finally, the selection bias hypothesis postulates that
analysts are objective, but because of the enhanced execution ability, banks with more optimistic analysts are more
likely to get selected as underwriters. We test these hypotheses in a previously unexplored setting, namely M&A
activities. Depending on whether an analyst is affiliated with the target or the acquirer and whether the analyst report
is about the target or the acquirer, the hypotheses predict analyst optimism in some cases and pessimism in other.
Therefore, examining the issue of analyst bias in the M&A context allows us to shed some light on alternative
explanations for the impact of analyst affiliation on the properties of analyst forecasts and recommendations. |
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