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

Posted: 11 Nov 2007

See all articles by Daphne Lui

Daphne Lui

ESSEC Business School

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management

Ane Tamayo

London School of Economics & Political Science (LSE)

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, over the period of 1997 to 2003. We find that the cross-sectional variation in risk ratings is largely explained by variables commonly viewed as measures of risk 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

Lui, Daphne and Markov, Stanimir and Tamayo, Ane Miren, What Makes a Stock Risky? Evidence from Sell-Side Analysts' Risk Assessments. Journal of Accounting Research, Vol. 45, pp. 629-665, June 2007. Available at SSRN: https://ssrn.com/abstract=1028479

Daphne Lui

ESSEC Business School ( email )

Av Bernard Hirsch
Cergy-Pontoise 95021
France

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972 883 5166 (Phone)

Ane Miren Tamayo (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 78494689 (Phone)

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