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Do Financial Analysts Restrain Insiders' Informational Advantage?

70 Pages Posted: 19 Feb 2009 Last revised: 12 May 2014

Marios A. Panayides

University of Pittsburgh - Katz Graduate School of Business

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

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Date Written: February 15, 2009

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.

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

JEL Classification: D14, G24, D82

Suggested Citation

Panayides, Marios A. and Ellul, Andrew, Do Financial Analysts Restrain Insiders' Informational Advantage? (February 15, 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1344032 or http://dx.doi.org/10.2139/ssrn.1344032

Marios A. Panayides

University of Pittsburgh - Katz Graduate School of Business ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

Andrew Ellul (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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