Client-Paid Research : Analyst Reports and Information Asymmetry

Sell-side research is a common source of corporate fundamental information, but most of the research is exclusively distributed to paying clients. This paper investigates whether the soft information in analyst reports exacerbates the information asymmetry among investors. I document that the increase of bid-ask spread on report days is positively associated with the quantity and the length of analyst textual reports. Looking at research payment methods, I find that reports paid by direct charges are longer and more likely to have exclusive content (i.e. without publicly disclosed quantitative summary measures) than report paid by bundled brokerage commissions that cover both trading service and research service. Furthermore, I find that firms covered by more analysts compensated by direct charges have a higher level of the bid-ask spread. In short, my findings suggest that the ways to pay for research determine the amount of analyst's soft information, shaping the information environment