Information, Sell-Side Research, and Market Making

48 Pages Posted: 17 Mar 2006 Last revised: 18 Sep 2009

See all articles by Leonardo Madureira

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management

Shane Underwood

Baylor University

Date Written: February 25, 2008


The interaction between an investment bank's research and market making arms may have important implications for the trading of a firm's stock. We investigate the impact that research has on the liquidity provided by the bank's market maker. Utilizing a large sample of Nasdaq firms, we show that market makers whose banks also provide research coverage provide more liquidity and contribute more to price discovery than do market makers without such research coverage. Finally, we show that such affiliated market makers are less affected by uncertainty following earnings announcements. Our results provide new evidence on the sources of liquidity improvements for Nasdaq firms, and suggest that the information produced by banks in the sell-side research process is beneficial to their market makers.

Keywords: Sell-Side Analysts, Market Making, Liquidity, Price Discovery

JEL Classification: G14, G19, G24

Suggested Citation

Madureira, Leonardo and Underwood, Shane, Information, Sell-Side Research, and Market Making (February 25, 2008). Journal of Financial Economics (JFE), Vol. 90, No. 2, pp. 105-126, 2008, EFA 2006 Zurich Meetings Paper, Available at SSRN:

Leonardo Madureira (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)


Shane Underwood

Baylor University ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4524 (Phone)

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