Do Financial Analysts Restrain Insiders' Informational Advantage?

70 Pages Posted: 21 Mar 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); University of Salerno - Centre for Studies in Economics and Finance (CSEF); European Corporate Governance Institute (ECGI)

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Date Written: March 18, 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? (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1364660 or http://dx.doi.org/10.2139/ssrn.1364660

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

University of Salerno - Centre for Studies in Economics and Finance (CSEF) ( email )

84084 Fisciano, Salerno
Italy

European Corporate Governance Institute (ECGI) ( email )

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

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