Journal of Financial and Quantitative Analysis

Research Articles

Sell-Side Information Production in Financial Markets

Zhaohui Chena1 and William J. Wilhelm Jr.a2

a1 Chen, McIntire School of Commerce, University of Virginia, PO Box 400173, Charlottesville, VA 22904,

a2 Wilhelm, McIntire School of Commerce, University of Virginia, PO Box 400173, Charlottesville, VA 22904, and Center for Economic and Policy Research.,


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.


  We thank Franklin Allen, Hendrik Bessembinder (the editor), Phillip Bond, Helena Fang, Armando Gomes, Gary Gorton, Pete Kyle, Paul Mahoney, Robert Marquez, David Musto, Maureen O’Hara, and Robert Verrecchia for helpful discussions. We also thank Marshall Blume, Roger Edelen, Simon Gervais, Paul Grout, Andrew Metrick, Ayako Yasuda, Bilge Yilmaz, and seminar participants at the 2nd Oxford Finance Symposium, 2004 European Financial Association Annual Meeting, 2007 Olin Law and Finance Conference (University of Virginia), University of Alabama, Columbia University, University of Houston, University of Kentucky, Louisiana State University, University of Maryland, Ohio State University, University of New Orleans, University of Virginia, University of Pennsylvania, and University of Wisconsin for their comments and suggestions. Special thanks to Avanidhar Subrahmanyam (the referee) for perceptive comments and suggestions that substantially improved the paper. This research was partially funded by the McIntire Foundation’s King Fund for Excellence and the Walker Fund. We are responsible for any errors or omissions.