andrew mario - Academia.edu (original) (raw)
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University of Southern California
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We investigate the competitive relationship between financial analysts and firm insiders for pric... more We investigate the competitive relationship between financial analysts and firm insiders for pricesensitive information and its influence on liquidity and price discovery. Without the presence of analysts, insiders have complete monopoly over information, influencing market equilibrium and liquidity. If analysts really compete for information (as in Fishman and Hagerty (1992)) they can reduce insiders' informational advantage with a consequent improvement of traders' welfare (as in ). We empirically investigate this hitherto ignored role of analysts by using a sample of stocks that lost all analyst coverage, thus giving insiders complete monopoly over price-sensitive information. The departure of analysts, which is a highly publicized event, leads to important changes in liquidity and market equilibrium. Using a matching-firm methodology to address possible endogeneity, we find that liquidity decreases significantly, price efficiency deteriorates rapidly, information asymmetries increase, and institutional shareholders and liquidity-motivated traders leave the stock. The impact of insiders' trading on adverse selection costs and price efficiency becomes larger and their trades become more profitable. We also find that an important role of analysts is their ability to make pricesensitive information available to the market and this information gets reflected quicker in prices, suggesting that analysts make a significant contribution to market quality by competing with insiders for information.
We investigate the competitive relationship between financial analysts and firm insiders for pric... more We investigate the competitive relationship between financial analysts and firm insiders for pricesensitive information and its influence on liquidity and price discovery. Without the presence of analysts, insiders have complete monopoly over information, influencing market equilibrium and liquidity. If analysts really compete for information (as in Fishman and Hagerty (1992)) they can reduce insiders' informational advantage with a consequent improvement of traders' welfare (as in ). We empirically investigate this hitherto ignored role of analysts by using a sample of stocks that lost all analyst coverage, thus giving insiders complete monopoly over price-sensitive information. The departure of analysts, which is a highly publicized event, leads to important changes in liquidity and market equilibrium. Using a matching-firm methodology to address possible endogeneity, we find that liquidity decreases significantly, price efficiency deteriorates rapidly, information asymmetries increase, and institutional shareholders and liquidity-motivated traders leave the stock. The impact of insiders' trading on adverse selection costs and price efficiency becomes larger and their trades become more profitable. We also find that an important role of analysts is their ability to make pricesensitive information available to the market and this information gets reflected quicker in prices, suggesting that analysts make a significant contribution to market quality by competing with insiders for information.