Security Analysis, Dealer-Analyst Collaboration, and Market Quality: Evidence from the NASDAQ Market in the USA

Authors

  • Kee H. Chung,

  • Mingsheng Li,

  • Xin Zhao

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    • The first author is from the Department of Finance and Managerial Economics, State University of New York (SUNY) at Buffalo and the School of Business Administration, Chung-Ang University. The second author is from the Department of Finance, Bowling Green State University and International Institute for Financial Studies and RCFMRP, Jiangxi University of Finance and Economics. The third author is from the Sam and Irene Black School of Business, Pennsylvania State University at Erie. The paper benefitted greatly from the comments and suggestions of an anonymous referee and Martin Walker (editor). The authors thank colleagues at SUNY-Buffalo, Bowling Green State University, and Pennsylvania State University-Erie for valuable comments and discussions. Li acknowledges the 2010 Summer Research Award and support from the Dean of College of Business Administration at the Bowling Green State University and financial support from Jiangxi University of Finance and Economics ‘Innovative Research Team Development Grant’. The usual disclaimer applies.


Kee H. Chung, Department of Finance and Managerial Economics, State University of New York (SUNY) at Buffalo, Buffalo, NY 14260, USA. e-mail: keechung@buffalo.edu

Abstract

Abstract:  In this study we analyze the effect of the security analysis activities on stock market liquidity and execution quality. We show that stocks followed by financial analysts have better market liquidity and execution quality than stocks with no analyst following, and stocks followed by affiliated analysts have better market liquidity and execution quality than stocks followed by unaffiliated analysts. The superior market liquidity of stocks followed by affiliated analysts can be explained by aggressive dealer quotes from analyst-dealer information sharing. Overall, our results suggest that public traders benefit from analyst coverage and collaboration between analysts and dealers through high liquidity and low transaction costs.

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