Buy-Side Analysts, Sell-Side Analysts and Private Information Production Activities

Abstract

This paper analyzes the effect of coverage initiation by a sell-side analyst on the production of private information. It shows that the sell-side analyst's information production may crowd out information production by buy-side analysts. Nonetheless, coverage initiation increases the total amount of private information that is available to institutional investors. Coverage initiation may result in greater losses sustained by liquidity traders and lower information gathering costs in the economy. It may also lead to higher market liquidity and lower price efficiency. Examining investment-banking relationship within a brokerage house, it is possible that prohibiting such relationship may decrease the overall amount of information available to institutional investors and price efficiency.

Keywords: Buy-side analysts, sell-side analysts, coverage initiation, market liquidity, price efficiency

JEL Classification: G14, G24