INVESTORS ADJUST EXPECTATIONS AROUND SELL-SIDE ANALYST REVISIONS IN IPO RECOMMENDATIONS

In this article I compare investor response to sell‐side analyst recommendation revisions of initial public offering (IPO) firms in the first three years after issue with that of a benchmark control sample of firms that have been public longer. I test whether investors in IPO firms adjust their initially optimistic expectations as information about new issues is released and uncertainty is resolved. In support of my hypothesis that investors adjust expectations downward, I find abnormally negative returns around analyst revisions of IPO firm recommendations. Additionally, I find the effect of analyst revisions on long‐run performance of IPO firms is economically significant.