Chapter 13: Orphan versus non-orphan IPOs: the difference analyst coverage makes
Numerous articles in academic journals or in the press have highlighted the importance of financial analysts’ coverage of firms that are going public. Newly public firms rely on their underwriters throughout the IPO process, especially during the marketing phase. The underwriters’ services include determining the offering price and the distribution of shares, but what is of particular importance for the issuer is receiving coverage through their financial analysts. During the initial public offering (IPO), investors are limited to information contained in the prospectus. As a result, the flow of information is restricted and sparse. Financial analysts can reduce these asymmetries. Indeed, coverage can transcend borders and financial markets and put the firm in the spotlight. Coverage is seen to add value by the firm because it can generate publicity, attract new consumers (Cliff and Denis, 2004), boost the share price (Chen and Ritter, 2000; Aggarwal et al., 2002), attract new investors, and reduce the cost of capital. However, coverage is not uniformly distributed and is mainly concentrated on large firms (as measured by their market capitalization). In the mid-2000s, 50 per cent of IPO firms were covered by a financial analyst and 35 per cent had no coverage.
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