Get access

ANALYST REPUTATION, DEALER AFFILIATION, AND MARKET MAKING

Authors


  • The authors thank an anonymous referee and the editors (Gerald D. Gay and Jayant Kale) for their detailed constructive comments and suggestions. The authors also thank Sung C. Bae, Lucy Chernykh, Kee H. Chung, Robert Edmister, Daniel P. Klein, Frank Laatsch, Mattias Nilsson, and 2007 Financial Management Association conference participants for helpful comments.

Abstract

We investigate the effects of analysts' affiliation and reputation on dealers' market making activities. We find that for a given stock, dealers who have affiliated analysts covering the stock quote and trade more aggressively than those who do not have any affiliated analysts. More important, the reputation of affiliated analysts plays an additional role in the affiliated dealer's quote and trade behavior. Dealers with affiliated star analysts post more aggressive quotes and have larger market shares than dealers with affiliated nonstar analysts. Although dealers who post more aggressive quotes also induce affiliated star analysts to cover the stocks, the positive effect of analyst reputation on the affiliated dealers' quote aggressiveness remains significant and robust after controlling for potential endogenous and simultaneous problems.

Ancillary