Finance

Financial economics

Futures contract

Epistemology

Profitability index

Information asymmetry

Philosophy

Business

Economics

Political science

Market liquidity

Institutional investor

Insider

Quality (philosophy)

Insider trading

Market efficiency

Corporate governance

Price discovery

Monetary economics

Journal of Financial and Quantitative Analysis

By collecting and disseminating price-sensitive information, financial analysts should reduce firm insiders’ informational advantage with a consequent impact on trading dynamics and market quality. We empirically examine the impact of complete analysts’ coverage termination on stocks’ liquidity, price discovery, and insider trading profitability. Termination leads to deteriorating liquidity and price efficiency, more informed trading, and higher profitability of insider trades. The magnitude of these effects depends on the strength of insiders’ ownership and on management’s decision whether to improve the firm’s information environment after coverage termination. Institutional investors alleviate, but do not eliminate, the negative effects of termination.

Do Financial Analysts Restrain Insiders’ Informational Advantage?