Abstract
<p>This study investigates impacts of sell-side analysts in the liquidity of firm’s shares of Brazilian Capital Markets. Liquidity hypothesis studied by Brennan and Subrahmanyan (1995), Brennan and Tamarowski (2000), Amihud and Mendelson (1986, 2000) and Amihud <em>et al. (</em>1997) defines that an increase in the number of analysts covering a particular stock increases its liquidity causing a positive impact on the stocks prices. This work investigates empirically whether increasing number of securities analysts impacts stock market liquidity, as observed in the American market by Brennan and Tamarowski (2000), using a sample of 179 listed stocks in the Brazilian stock exchange, BM&amp;FBovespa. This work determines liquidity-measuring firm’s Lambda dollar derived by Kyle (1985) and then applying cross section regression of Lambda dollar as dependent variable and number of analysts as independent variable. Results indicate that stock market liquidity increased with number of securities stock analysts in favor of liquidity hypothesis.</p>
Highlights
Sell-side analysts hold a privileged position in capital markets compared to average investors
This research hypothesis comprises identify the existence of a negative relation between sell-side analyst coverage and liquidity in order to understand the function of security analyst in the Brazilian capital market efficiency
Analyzing results presented on (Table 4), it can be inferred that there is a strong and negative relationship between number of securities analysts and Lambda Brazilian Reais, R$λ,. This result suggests that analysts positively increase the stock liquidity, since the increase in the number of analysts causes a decrease in the R$λ, which, as previously explained, indicates a liquidity increase
Summary
Sell-side analysts hold a privileged position in capital markets compared to average investors. Such position is due to its close relationship with investor relations departments in order to access the most update and relevant information to develop buy and sell recommendation reports. If market is efficient in the strong form, no investor can earn excess returns using any information, whether publicly available or not, and sell-side securities analysts’ recommendation reports should not have impact on stocks negotiation. In other words if all information, without exception, are already available and reflected in the stock price and that any and all deviation from the fair price is random not presenting any pattern which offers abnormal returns to investors, sell-side analysts do not play a significant role in the capital markets
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