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

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