Changes in underwriters' selection of comparable firms pre- and post-IPO: Same bank, same company, different peers

We compare the selection of peer firms made by investment banks as underwriters at the IPO with that done shortly thereafter as analysts. We find that 3 out of 7 comparable firms, on average, are changed. The peers published in the IPO prospectuses have higher valuations than those published in the post-IPO equity research reports of the same firm, especially if the underwriter is US-based. We argue that underwriters select comparable firms that make the issuer's shares look conservatively priced at the IPO, while this conflict of interest tends to fade afterwards. The upward bias in peer selection is larger for underwriters with greater market power, and lower for repeat players in the IPO market. A biased selection of peers results in higher underpricing and lower long run performance of IPOs.