Do Financial Analysts Restrain Insiders' Informational Advantage?

Abstract:     
We investigate the competitive relationship between financial analysts and firm insiders for price-sensitive information. We identify the influence of this competition on trade dynamics by empirically examining the impact of complete analysts’ coverage termination on stocks’ liquidity, price discovery and insider trading. Termination leads to a deterioration in liquidity and price efficiency, an increase in information asymmetries, and higher profitability of insider trades. Importantly, the magnitude of these effects depends on insiders’ presence. Institutional investors alleviate, but do not eliminate, the effects of coverage termination. Overall, this evidence indicates that analysts contribute to market quality through competition with insiders.

Number of Pages in PDF File: 70

Keywords: Sell-side research, Insiders, Insider Trading, Information Asymmetries, Liquidity

JEL Classification: D14, G24, D82

working papers series