Pump and Dump: An Empirical Analysis of the Relation Between Corporate Financing Activities and Sell-side Analyst Research

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Pump and Dump: An Empirical Analysis of the Relation Between Corporate Financing Activities and Sell-side Analyst Research

Working paper

Sell-side analysts have long faced allegations that pressures to generate investment banking business compromise the soundness of their investment research. Despite such allegations recently — and civil settlements of hundreds of millions of dollars — the available evidence is largely restricted to anecdotes involving a small number of analysts.

In this paper, we provide a comprehensive examination of the relation between corporate financing activities and sell-side analyst research. We find that sell-side analysts’ forecasts and recommendations are most optimistic for firms that are issuing securities and least optimistic for firms that are repurchasing securities, and we find that the relation between corporate financing activities and analyst research is pervasive.

The relation is evident in analysts’ short-term earnings forecasts, long-term earnings forecasts, stock recommendations and target prices, and it extends to corporate financing activities in both debt and equity markets.

Our findings have several implications. First, they provide strong and systematic evidence in support of allegations that sell-side analysts routinely generate overly optimistic stock research for firms that are issuing new securities. Second, they complement existing evidence of a systematic relationship between financing actions and future stock returns. Third, our work complements existing research in whether analysts affiliated with a company issue more-favorable research on that company that unaffiliated analysts do.

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