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Do Financial Analysts Restrain Insiders’ Informational Advantage?

  • Andrew Ellul and Marios Panayides

By collecting and disseminating price-sensitive information, financial analysts should reduce firm insiders’ informational advantage with a consequent impact on trading dynamics and market quality. We empirically examine the impact of complete analysts’ coverage termination on stocks’ liquidity, price discovery, and insider trading profitability. Termination leads to deteriorating liquidity and price efficiency, more informed trading, and higher profitability of insider trades. The magnitude of these effects depends on the strength of insiders’ ownership and on management’s decision whether to improve the firm’s information environment after coverage termination. Institutional investors alleviate, but do not eliminate, the negative effects of termination.

Corresponding author
* Ellul (corresponding author),, Indiana University Kelley School of Business, University of Naples Federico II Center for Studies in Economics and Finance (CSEF), and European Corporate Governance Institute (ECGI); Panayides,, University of Pittsburgh Katz Graduate School of Business.
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We are grateful for comments and suggestions made by Leonce Bargeron, Robert Battalio, Utpal Bhattacharya, Ekkehart Boehmer, Shane Corwin, Mike Fishman, Neil Galpin, Jarrad Harford (the editor), Craig Holden, Paul Irvine, Tullio Jappelli, Robert Korajczyk, Bruce Lehmann, Michael Lemmon, Alexander Ljungqvist, Leonardo Madureira, Nandu Nagarajan, Maureen O’Hara, Marco Pagano, P. Raghavendra Rau, Ailsa Roell, Darren Roulstone (the referee), Andriy Shkilko (discussant), Avanidhar Subrahmanyam, Erik Theissen (discussant), Shawn Thomas, Vish S. Viswanathan, participants at the 2008 National Bureau of Economic Research Market Microstructure meeting, the 2009 Financial Intermediation Research Society Conference, the 2009 Western Finance Association Annual Meeting, the 2009 European Finance Association Meeting, and the 2009 Financial Management Association Conference, and seminar participants at Indiana University, London School of Economics, University of Notre Dame, University of Pittsburgh, and University of Naples Federico II. We thank Roger White for excellent research assistance.

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