The impact of non-professional analyst coverage on stock market liquidity: An instrumental variables approach

34 Pages Posted: 27 Aug 2020 Last revised: 3 Aug 2021

See all articles by Jörg Claussen

Jörg Claussen

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management); Copenhagen Business School - Department of Innovation and Organizational Economics

Rouven Litterscheidt

Ludwig-Maximilians-Universität München, LMU Munich School of Management

David Streich

Ludwig-Maximilians-Universität München, LMU Munich School of Management

Date Written: August 10, 2020

Abstract

Against the backdrop of the recent decline of professional analyst (PA) stock coverage, we study whether research support by non-professional analysts (NPAs) can increase stock market liquidity. In particular, we employ an instrumental variables approach to estimate the causal impact of NPA coverage on the market liquidity of covered stocks. We find that firms that are covered by NPAs in a given quarter display substantially higher market liquidity (as measured by trading volume). To identify the mechanism underlying this relationship, we investigate which types of firms exhibit the highest liquidity increase from NPA coverage. We find that the impact of NPA coverage is stronger when there is no simultaneous PA coverage, as well as for smaller and growth stocks. These findings suggest that NPA coverage stimulates market liquidity by increasing investor recognition and reducing information asymmetry, where investor recognition seems to be the dominant channel.

Keywords: analyst coverage, equity research support, stock market liquidity, investor recognition, information asymmetry

JEL Classification: G14, G20, M41

Suggested Citation

Claussen, Jörg and Litterscheidt, Rouven and Streich, David, The impact of non-professional analyst coverage on stock market liquidity: An instrumental variables approach (August 10, 2020). Available at SSRN: https://ssrn.com/abstract=3656583 or http://dx.doi.org/10.2139/ssrn.3656583

Jörg Claussen (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Copenhagen Business School - Department of Innovation and Organizational Economics ( email )

Kilevej 14A
Frederiksberg, 2000
Denmark

Rouven Litterscheidt

Ludwig-Maximilians-Universität München, LMU Munich School of Management ( email )

Schackstraße 4
Munich, DE Bavaria 80539
Germany

David Streich

Ludwig-Maximilians-Universität München, LMU Munich School of Management ( email )

Schackstraße 4
Munich, DE Bavaria 80539
Germany

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