Security Analysis, Dealer-Analyst Collaboration, and Market Quality: Evidence from the Nasdaq Market in the USA
Journal of Business Finance & Accounting, Forthcoming
43 Pages Posted: 5 Jul 2012
Date Written: July 4, 2012
In this study we analyze the effect of the security analysis activities on stock market liquidity and execution quality. We show that stocks followed by financial analysts have better market liquidity and execution quality than stocks with no analyst following, and stocks followed by affiliated analysts have better market liquidity and execution quality than stocks followed by unaffiliated analysts. The superior market liquidity of stocks followed by affiliated analysts can be explained by aggressive dealer quotes from analyst-dealer information sharing. Overall, our results suggest that public traders benefit from analyst coverage and collaboration between analysts and dealers through high liquidity and low transaction costs.
Keywords: Analyst following, Dealers, Spreads, Depths, Execution quality, Price impact, Adverse selection cost, Quote aggressiveness, Trading costs, SEC Rule 605
JEL Classification: G14
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