What Makes a Stock Risky? Evidence from Sell-Side Analysts' Risk Ratings
ESSEC Business School
University of Texas at Dallas - Naveen Jindal School of Management
London School of Economics & Political Science (LSE)
September 12, 2006
We examine the determinants and the informativeness of financial analysts' risk ratings using a large sample of research reports issued by Salomon Smith Barney, now Citigroup. We find that the cross-sectional variation in risk ratings is largely explained by variables commonly viewed as risk proxies such as idiosyncratic risk, size, book-to-market and leverage. In addition, earnings-based measures of risk such as earnings quality and accounting losses also contribute to explaining the cross-sectional variation in the risk ratings. Finally, we document that the risk ratings can be used to predict future return volatility after controlling for other predictors of future volatility. We conclude that analysts play an important role as providers of information about investment risk.
Number of Pages in PDF File: 58
Keywords: Risk, mispricing, volatility, financial analysts, information
JEL Classification: G14, G29, M41working papers series
Date posted: February 2, 2005
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