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The Relation between Analysts' Forecasts of Long‐Term Earnings Growth and Stock Price Performance Following Equity Offerings *
Author(s) -
DECHOW PATRICIA M.,
HUTTON AMY P.,
SLOAN RICHARD G.
Publication year - 2000
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/j.1911-3846.2000.tb00908.x
Subject(s) - earnings , earnings growth , equity (law) , economics , growth stock , stock price , term (time) , stock (firearms) , initial public offering , financial economics , business , monetary economics , finance , stock market , restricted stock , mechanical engineering , paleontology , physics , horse , quantum mechanics , series (stratigraphy) , political science , law , biology , engineering
In this paper we evaluate the role of sell‐side analysts' long‐term earnings growth forecasts in the pricing of common equity offerings. We find that, in general, sell‐side analysts' long‐term growth forecasts are systematically overly optimistic around equity offerings and that analysts employed by the lead managers of the offerings make the most optimistic growth forecasts. In additional, we find a positive relation between the fees paid to the affiliated analysts' employers and the level of the affiliated analysts' growth forecasts. We also document that the post‐offering underperformance is most pronounced for firms with the highest growth forecasts made by affiliated analysts. Finally, we demonstrate that the post‐offering underperformance disappears once we control for the overoptimism in earnings growth expectations. Thus, the evidence presented in this paper is consistent with the “equity issue puzzle” arising from overly optimistic earnings growth expectations held at the time of the offerings.