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Information, sell-side research, and market making

Author Info

  • Madureira, Leonardo
  • Underwood, Shane

Abstract

The interaction between an investment bank's research and market making arms may have important implications for the trading of a firm's stock. We investigate the impact that research has on the liquidity provided by the bank's market maker. Utilizing a large sample of Nasdaq firms, we show that market makers whose banks also provide research coverage provide more liquidity and contribute more to price discovery than do market makers without such research coverage. Finally, we show that such "affiliated" market makers are less affected by uncertainty following earnings announcements. Our results provide new evidence on the sources of liquidity improvements for Nasdaq firms, and suggest that the information produced by banks in the sell-side research process is beneficial to their market makers.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(08)00143-8
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 90 (2008)
Issue (Month): 2 (November)
Pages: 105-126

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Handle: RePEc:eee:jfinec:v:90:y:2008:i:2:p:105-126
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

Keywords: Sell-side analysts Market making Liquidity Price discovery;

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Cited by:

  1. Anand, Amber & Gatchev, Vladimir A. & Madureira, Leonardo & Pirinsky, Christo A. & Underwood, Shane, 2011. "Geographic proximity and price discovery: Evidence from NASDAQ," Journal of Financial Markets, Elsevier, vol. 14(2), pages 193-226, May.
  2. Lerner, Peter, 2010. "Theoretical analysis of the bid-ask bounce and Related Phenomena," MPRA Paper 35929, University Library of Munich, Germany.
  3. Kadan, Ohad & Madureira, Leonardo & Wang, Rong & Zach, Tzachi, 2012. "Analysts' industry expertise," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 95-120.
  4. Nicolas Della Penna & Mark D. Reid, 2011. "Bandit Market Makers," Papers 1112.0076, arXiv.org, revised Aug 2013.
  5. Laurence Lescourret, 2012. "Non-fundamental Information and Market-makers' Behavior during the NASDAQ Preopening Session," Post-Print hal-00772798, HAL.
  6. Duarte-Silva, Tiago, 2010. "The market for certification by external parties: Evidence from underwriting and banking relationships," Journal of Financial Economics, Elsevier, vol. 98(3), pages 568-582, December.
  7. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.
  8. Bank for International Settlements, 2014. "Market-making and proprietary trading: industry trends, drivers and policy implications," CGFS Papers, Bank for International Settlements, number 52, October.
  9. Allen, Linda & Gottesman, Aron A. & Peng, Lin, 2012. "The impact of joint participation on liquidity in equity and syndicated bank loan markets," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 50-78.
  10. Chunmei Lin & Massimo Massa & Hong Zhang, 2014. "Mutual Funds and Information Diffusion: The Role of Country-Level Governance," Tinbergen Institute Discussion Papers 14-079/IV/DSF76, Tinbergen Institute.

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