Retail Trading and Analyst Coverage
41 Pages Posted: 29 Apr 2019 Last revised: 30 Jan 2024
Date Written: May 3, 2023
How does retail trading impact information supply in financial markets? We build a trading model with endogenous information supply where analysts maximize trading volume by institutional investors. In equilibrium, sell-side analysts provide higher quality signals in stocks with large retail interest, as institutional investors can trade more aggressively without causing significant price impact. We provide empirical evidence supporting the main prediction of the model: a one standard deviation increase in retail trading leads to an additional 0.6 analysts covering the stock. To establish causality, we confirm our results using stock splits as a plausibly exogenous shock to retail trading.
Keywords: retail trading, analyst coverage, liquidity, price efficiency
JEL Classification: G11, G24, G40, D83, M41
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