Why Do Financial Analysts Strive to Be Irrelevant? Career Concerns and Endogenous Coverage Termination

45 Pages Posted: 7 May 2015 Last revised: 12 Apr 2016

See all articles by Marco A. Navone

Marco A. Navone

Finance Discipline Group - UTS Business School; Bocconi University - CAREFIN - Centre for Applied Research in Finance; Financial Research Network (FIRN)

Fernando Zapatero

Questrom School of Business, Boston University

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2015

Abstract

In this paper we investigate the negative relationship between analysts’ coverage and stocks idiosyncratic volatility. While prior research argues that analysts cause the low level of idiosyncratic risk because they lack access to firm-specific information we hypothesize that the causal relation goes in the opposite direction. 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.

Keywords: Financial Analysts, Career Concerns, Idiosyncratic Risk

JEL Classification: G11, G14, G23

Suggested Citation

Navone, Marco A. and Zapatero, Fernando, Why Do Financial Analysts Strive to Be Irrelevant? Career Concerns and Endogenous Coverage Termination (May 1, 2015). BAFFI CAREFIN Centre Research Paper No. 2015-7, Marshall School of Business Working Paper No. FBE 03.16, Available at SSRN: https://ssrn.com/abstract=2603610 or http://dx.doi.org/10.2139/ssrn.2603610

Marco A. Navone (Contact Author)

Finance Discipline Group - UTS Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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