Investment Analysis and Price Formation in Securities Markets
Michael J. Brennan
University of California, Los Angeles (UCLA) - Finance Area
Avanidhar Subrahmanyam
University of California, Los Angeles (UCLA) - Finance Area
London Business School Institute of Finance and Accounting Working Paper 188
Abstract:
This paper investigates empirically the relation between the number of analysts following a security and the cost of transacting in the security, using intraday data for the year 1988. Using single and simultaneous equation specifications, it is found that the quoted bid-ask spreads on a large sample of securities are positively related to the number analysts following the security. On the other hand, estimates of the measure of market illiquidity introduced by Kyle (1985) are negatively related to analyst following. The former result is consistent with the model of Glosten and Milgrom (1985), while the latter is consistent with that of Admati and Pfleiderer (1988). Estimates of structural parameters of a model of endogenous information acquisition developed by Admati and Pfleiderer (1988) provide limited support for the model.
JEL Classification: G1, G14
working papers series
Suggested Citation
Brennan, Michael J. and Subrahmanyam, Avanidhar, Investment Analysis and Price Formation in Securities Markets. London Business School Institute of Finance and Accounting Working Paper 188. Available at SSRN: http://ssrn.com/abstract=5482
