What Makes a Stock Risky? Evidence from Sell-Side Analysts' Risk Ratings

Lui, Daphne; Markov, Stanimir; Tamayo, Ane

doi:10.2139/ssrn.654504

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What Makes a Stock Risky? Evidence from Sell-Side Analysts' Risk Ratings

58 Pages Posted: 2 Feb 2005

See all articles by Daphne Lui

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management

Ane Tamayo

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: September 12, 2006

Abstract

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.

Keywords: Risk, mispricing, volatility, financial analysts, information

JEL Classification: G14, G29, M41

Suggested Citation: Suggested Citation

Lui, Daphne and Markov, Stanimir and Tamayo, Ane Miren, What Makes a Stock Risky? Evidence from Sell-Side Analysts' Risk Ratings (September 12, 2006). Available at SSRN: https://ssrn.com/abstract=654504 or http://dx.doi.org/10.2139/ssrn.654504