IPO underwriting incentives and macroeconomic forecast optimism

Despite the importance of macroeconomic expectations in the capital market, limited research has explored the factors contributing to bias in macroeconomic forecasts of professional forecasters. This paper investigates whether broker-affiliated macro analysts provide biased macroeconomic narratives to support the brokers’ IPO underwriting business. Using a comprehensive dataset of GDP forecasts and macroeconomic reports from China, we find that IPO-active brokers issue significantly more optimistic GDP forecasts and reports with a more positive tone compared to non-underwriting forecasters. This optimistic bias is more pronounced for brokers with intense underwriting business pressure, IPO firms that are sensitive to macroeconomic fluctuation, and during periods of heightened retail investor sentiment. More importantly, we find that the optimistic macro narrative, particularly GDP forecast optimism, is associated with increased subsequent retail investor participation and improved short-term IPO performance. Consistent with strategic forecasting, we further demonstrate that GDP forecast optimism is associated with lower operating profit and higher crash risk in the long run. Our findings highlight a significant conflict of interest in which macroeconomic forecasts are strategically employed to influence investor perceptions and facilitate IPO success. Our study contributes to the literature by demonstrating the influence of business incentives on macroeconomic forecasts and offers new insights into analysts’ information production as well as its impact on retail investor behavior in the IPO market.