Analyst Coverage and Stock Price Crash Risk

• In Event: Accounting Knowledge and Decision-Making

Abstract

Using a sample of 24,228 firm-year observations, we find that increases in analyst coverage lead to decreases in one-year-ahead crash risk. Prior literature attributes crash risk to managers hoarding bad news. Analysts could reduce such behavior by reducing information asymmetry or exacerbate it by increasing the pressure on managers for short-term results. Our results support the former argument and are inconsistent with the latter. Moreover, we find this result to be more pronounced when the coverage change is attributable to All-Star analysts, supporting our hypothesis that star analysts reduce future crashes by disseminating information more promptly to the market than their non-star counterparts. Our findings remain after controlling for endogeneity and are robust to alternative measures of crash risk. Finally, we find that analysts, particularly star analysts, choose to cover firms with greater prior firm-specific crash risk, consistent with the argument that they provide greater value to their clients in the context of crash-prone firms.

Authors

• Yvonne Lee, University of North Florida

• Bin Srinidhi, University of Texas-Arlington

• Ramgopal Venkataraman, University of Texas-Arlington