The impact of reputation on analysts' conflicts of interest: Hot versus cold markets

During periods of high IPO underpricing, unaffiliated all-star analysts from high reputation banks issue fewer strong-buy recommendations while unaffiliated all-star analysts from low reputation banks do not change their level of optimism. In contrast, unaffiliated non-star analysts from both high and low reputation banks issue more strong-buy recommendations. Consistent with the results on analyst optimism, the market reacts more favorably to strong-buy recommendations by unaffiliated all-star analysts from high reputation banks than other unaffiliated analysts during high IPO underpricing periods. Finally, we find that unaffiliated non-star analysts from low reputation banks reduce their coverage following an SEO if they are not selected as a part of the managing syndicate. Collectively, our results indicate that during periods of high IPO underpricing unaffiliated analysts face conflicts of interest, but personal-level reputation, and to a lesser extent bank-level reputation, plays a role in reducing this bias.