Sell-Side Information Production in Financial Markets

Chen, Zhaohui; Wilhelm, William J.

doi:10.2139/ssrn.1690571

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Sell-Side Information Production in Financial Markets

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

51 Pages Posted: 12 Oct 2010 Last revised: 23 May 2012

See all articles by Zhaohui Chen

Zhaohui Chen

University of Virginia - McIntire School of Commerce

William J. Wilhelm

University of Virginia - McIntire School of Commerce

Date Written: April 2011

Abstract

We study decisions to sell nonexcludable private information in the presence of a trading opportunity. Sell-side agents heighten competition among agents who buy their signals to combine with their own for proprietary trading purposes and thereby promote financial market efficiency. This result holds even when the sell-side production technology is not unique. But sell-side information is subject to underinvestment if producers do not internalize the benefits. The model suggests that fee-based compensation for corporate advisory services diminishes this problem and that market efficiency is undermined by forces steering investment-banking resources toward proprietary trading.

Keywords: Financial Intermediation, Investment Banking, Information Production, Selling Information

JEL Classification: L22, G24, G14, D82

Suggested Citation: Suggested Citation

Chen, Zhaohui and Wilhelm, William J., Sell-Side Information Production in Financial Markets (April 2011). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1690571 or http://dx.doi.org/10.2139/ssrn.1690571