Underwriters and the Broken Chinese Wall: Institutional Holdings and Post-IPO Securities Litigation

We examine whether underwriters have an information advantage over other institutional investors in new public companies. Focusing on firms targeted by IPO‐related class action litigation and a matched sample of nonsued firms, we find evidence suggesting that lead underwriters retain an information advantage in the firms they take public and that they capitalize on this information by closing out or reducing their holdings in sued firms prior to the eventual litigation date. An examination of analyst opinions suggests that analysts affiliated with lead underwriters are reluctant to reduce their earnings forecasts or downgrade sued firms before the litigation date.