Sell-side analysts' reports lead to overpriced stock offerings, according to research by Richard Sloan and Patricia Dechow of the Wharton School of the University of Pennsylvania and Amy Sweeney of the Harvard Business School.
The reason that firms issue stock experience unusually low returns during the first few years after issuance is because the stock is simply overpriced to begin with, the researchers say.
Long-run earnings forecasts issued by sell-side equity analysts were found to be systematically overly optimistic, according to the researchers. Those appear to be incorporated in stock prices.
Analysts employed by the lead underwriter of a stock offering issue particularly rosy long-term earnings forecasts, according to the study. Despite "Chinese walls" securities firms say exist between their underwriting and research sides to prevent conflicts of interests, the researchers said: "the study's results are consistent with investment banks using their sell-side analysts to help promote their underwriting clients."