The Impact of Sell-Side Analyst Research Coverage on an Affiliated Broker's Market Share of Trading Volume

Abstract

Using NASDAQ reported individual stock level trading volume, we find that analyst research coverage on a stock increases an affiliated broker's market share of trading volume in that stock by 0.8 percent, on average, which corresponds to an additional annual volume of about one million shares in an average stock. Optimistic recommendations increase market share by an additional 0.4 percent, on average, which suggests that analysts have an incentive to issue upwardly biased recommendations. However, affiliated brokers receive more trading volume when recommendations are provided by analysts with better reputations and when analysts report new information to the market via coverage upgrades and downgrades. Furthermore, as the length of time during which an analyst maintains the same recommendation on a stock increases, the impact of the analyst's research coverage on the affiliated broker's market share of volume in the stock declines. The latter findings indicate that sell-side institutions are rewarded for high quality research services and for providing new information to the market.

Keywords: Analysts, Trading Volume, NASDAQ

JEL Classification: G24