I compare the return surrounding a sell-side analyst's initiation of coverage to the return surrounding a recommendation by an analyst who already covers the stock. The market responds more positively to analysts' initiations than to other recommendations. The incremental price impact of an initiation is 1.02% greater than the reaction to a recommendation by an analyst who already covers the stock. I examine whether the hypothesis that analyst coverage increases liquidity explains this incremental return. I find that liquidity improves after initiations, but that one must extend the liquidity hypothesis in order to fully explain the incremental price impact. Liquidity gains subsequent to analyst initiation depend on the analyst's recommendation. The more positive the initial recommendation, the greater the subsequent liquidity improvement. I also find that the initiation abnormal return correlates with the subsequent improvements in liquidity. Corporations should encourage analyst coverage to capture this liquidity benefit.

This paper investigates the impact of institutional trading on SEO lead underwriter choice. We measure the trading intensity of the lead investment bank in several different ways and find that bank trading has a significant effect on underwriter choice. A bank that concentrates its trading in particular stocks has an improved probability of earning the underwriting mandate in those stocks. We also find that the trading intensity of the lead bank has a significant effect on SEO underpricing and the composition of the underwriting syndicate. We attribute these results to the fact that banks that are large and active traders in an issuer's stock have a competitive advantage in marketing to the current shareholder base. For smaller banks, we show that concentrating the bank's own trading in the issuer's stock produces similar effects.