Do Financial Analysts Penalize Excessive Growth? Evidence From IPOs

This paper investigates the impact of growth rates on analyst recommendations for European firms that underwent an IPO between 2015 and 2020. Drawing from signaling theory, which posits that IPO firms emit signals to the market through their growth rates, we explore how growth in employment and sales influences analysts, who play a key role as information intermediaries. Our findings reveal that analysts prefer continuous growth in employees when making their recommendations, though the impact is modest. However, an inverted U‐shaped relationship indicates that excessive sales growth negatively impacts recommendations, except in high technology industries where consistent growth is anticipated and valued. For high technology firms, high growth in employment is positively associated with analyst recommendations, with a significant economic impact. These results highlight the ways in which growth metrics signal IPO firm quality to analysts, particularly in the context of high technology industries.