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Sell-Side Information Production in Financial Markets

Published online by Cambridge University Press:  12 June 2012

Zhaohui Chen  and
William J. Wilhelm Jr.
Zhaohui Chen
Affiliation:
Chen, McIntire School of Commerce, University of Virginia, PO Box 400173, Charlottesville, VA 22904, [email protected]
William J. Wilhelm Jr.
Affiliation:
Wilhelm, McIntire School of Commerce, University of Virginia, PO Box 400173, Charlottesville, VA 22904, and Center for Economic and Policy Research., [email protected]
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Abstract

We study decisions to sell nonexcludable private information in the presence of a trading opportunity. Sell-side agents heighten competition among agents who buy their signals to combine with their own for proprietary trading purposes and thereby promote financial market efficiency. This result holds even when the sell-side production technology is not unique. But sell-side information is subject to underinvestment if producers do not internalize the benefits. The model suggests that fee-based compensation for corporate advisory services diminishes this problem and that market efficiency is undermined by forces steering investment-banking resources toward proprietary trading.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 4 , August 2012 , pp. 763 - 794
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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