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IPO performance and earnings expectations: some French evidence

IPO performance and earnings expectations: some French evidence

offering. This suggests

offering. This suggests that the market identifies “high quality” companies but fails to incorporate this information into the short-term post-IPO price properly. Finally, “hot IPO years” like 1996, 1997 and 1998 do not appear to be good vintages for IPO investors. The findings of sections 4 and 5 suggest that IPO pricing has been mostly efficient in our sample: French IPOs as a whole perform normally, and no subcategory of IPOs exhibits abnormal performance over the entire 36-month period-- at least when these subcategories are defined using information known at the time of the IPO. 6. Earnings expectations and IPO stock price performance Do earnings forecasts issued at the time of the IPO embody investors’ expectations about companies’ post-IPO earnings performance ? To address this issue, we first focus on earnings forecasts and ask the following questions: - Are analyst forecasts biased for IPO firms? - Are pre-IPO prospectus forecasts more biased than analysts’ forecasts around the equity offering? - Are these forecasts more biased for certain types of analysts (e.g. for affiliated analysts, i.e. the ones who work with the lead underwriter of the offering)? - Are forecasts for IPOs more biased than forecasts for seasoned firms? - More generally, what are the determinants of analyst forecast errors? Second, we ask whether earnings forecast errors explain IPO long-term stock price performance, and which ones : we distinguish between forecasts published in the IPO prospectus, those published by financial analysts affiliated with the bank taking the company public, and those published by unaffiliated analysts. 6-1- Overview of existing literature 14

There is an extensive literature about analyst forecast errors and their impact on stock price behavior in the U.S. It is well documented (Brown (1996), Brown (1997) a and b) that analysts tend to be optimistic in their earnings forecasts, and it has been argued that this bias results from analysts’incentives (see for instance Lim (2001) for evidence on the conflicting incentives security analysts face). When a firm goes public, security analysts, who generally work with both the brokerage team and the corporate finance team in charge of the IPO, have an even stronger incentive to issue buy recommendations and / or optimistic long term forecasts to make the deal look more attractive to the market. Rajan and Servaes (1997) find that analyst optimism is about twice as severe for IPOs as for seasoned companies. Krigman, Shaw and Womack (1999) argue that analyst coverage of the company is one of the services that is the most sought by IPO firms. U.S. studies have documented two other facts. First, affiliated analysts tend to be more biased than independent ones at or around IPOs (see Dechow, Hutton and Sloan (2000)). Second, analysts’ optimism around Initial Public Offerings is not fully taken into account by the market (see Michaely and Womack (1999) who show that the stocks recommended by analysts affiliated to lead underwriters perform poorly compared to the ones that are recommended by independent analysts, and Dechow, Hutton and Sloan (2000) who show that analyst forecast errors explain the long-term performance of IPOs). 6-2- Data The data we use in this part of the study comes from two sources. First, we use the earnings forecasts that, according to French regulations, must be published in IPO prospectuses. Hereafter, we label these earnings forecasts “Prospectus Forecasts” and the errors relative to actual earnings per share “Prospectus Forecast Errors” (PFE). Second, from the analyst-by- analyst I/B/E/S historical earnings estimate database, we collect earnings forecasts that are issued by all the analysts who follow the stock (labeled as “analysts’ forecasts”). For each IPO in our 15

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