Why Do Financial Analysts Strive to Be Irrelevant? Career Concerns and Endogenous Coverage Termination
50 Pages Posted: 5 Nov 2014
Date Written: September 1, 2014
In this paper we investigate the endogeneity of analysts’ coverage decision. Specifically we argue that due to reputational concerns analysts avoid covering stocks with high levels of specific risk. Using three novel quasi-natural experiments we show that analysts’ coverage drops after an exogenous increase in idiosyncratic volatility. We also show that coverage increases after an exogenous decrease of specific risk and that an exogenous decrease in the number of analysts covering a firm lead to a decrease firm-specific information. Looking at individual analysts’ characteristics we show that the probability of dropping coverage after an increase in idiosyncratic risk is higher for younger analysts, analysts with lower reputation and lower risk aversion, all factors that indicates higher reputational and career concerns.
Keywords: Financial Analysts, Career Concerns, Idiosyncratic Risk
JEL Classification: G11, G14, G23
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