Investment Analysis and Price Formation in Securities Markets

London Business School Institute of Finance and Accounting Working Paper 188

Posted: 2 Sep 1999

See all articles by Michael J. Brennan

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Abstract

This paper investigates empirically the relation between the number of analysts following a security and the cost of transacting in the security, using intraday data for the year 1988. Using single and simultaneous equation specifications, it is found that the quoted bid-ask spreads on a large sample of securities are positively related to the number analysts following the security. On the other hand, estimates of the measure of market illiquidity introduced by Kyle (1985) are negatively related to analyst following. The former result is consistent with the model of Glosten and Milgrom (1985), while the latter is consistent with that of Admati and Pfleiderer (1988). Estimates of structural parameters of a model of endogenous information acquisition developed by Admati and Pfleiderer (1988) provide limited support for the model.

JEL Classification: G1, G14

Suggested Citation

Brennan, Michael John and Subrahmanyam, Avanidhar, Investment Analysis and Price Formation in Securities Markets. London Business School Institute of Finance and Accounting Working Paper 188. Available at SSRN: https://ssrn.com/abstract=5482

Michael John Brennan (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825 3587 (Phone)
310-206 8419 (Fax)

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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