Analyst Following and Market Liquidity

Posted: 13 Apr 2004

See all articles by Darren T. Roulstone

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business


This paper investigates the relation between analyst characteristics (number of analysts following a firm and their forecast dispersion) and market liquidity characteristics (bid-ask spreads and depths and the adverse-selection component of the spread). Prior research has found contradictory results on the relation between analyst following and market liquidity and has offered differing theories on how analysts affect liquidity. While prior research has posited analysts as proxies for privately informed trade or as signals of information asymmetry, I hypothesize that analysts provide public information, implying that analyst following (forecast dispersion) should have a positive (negative) association with liquidity. Cross-sectional simultaneous estimations provide support for this hypothesis. The results are both statistically significant and economically important. Granger-causality tests indicate that analyst characteristics lead market liquidity characteristics. These results clarify the role of analysts in providing information to financial markets and highlight benefits of increased analyst following.

Keywords: Analysts Following, Bid-Ask Spreads, Information Asymmetry

JEL Classification: G10, G12, G14, G29, M41

Suggested Citation

Roulstone, Darren T., Analyst Following and Market Liquidity. Available at SSRN:

Darren T. Roulstone (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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