Retail Trading and Analyst Coverage
42 Pages Posted: 29 Apr 2019 Last revised: 7 May 2021
Date Written: May 4, 2021
How does retail trading impact information supply in financial markets? We build a model where sell-side analysts compete for scarce institutional investor attention to maximize volume for brokerages. Analysts cluster in retail-heavy stocks, where investors can trade more aggressively without revealing information and incurring price impact. Empirically, retail trading and coverage are strongly correlated after controlling for factors associated with analyst following. Finally, a market-wide increase in retail demand allows analysts to diversify coverage without sacrificing institutional volume. Throughout 2020, as brokerage fee cuts and COVID-19 triggered a retail trading surge, coverage becomes significantly less driven by retail volumes.
Keywords: retail trading, analyst coverage, price impact, investor attention, learning
JEL Classification: G11, G24, G40, D83, M41
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