Analyst Coverage and Future Stock Price Crash Risk

Journal of Applied Accounting Research, Forthcoming

Posted: 24 Mar 2019 Last revised: 3 May 2019

See all articles by Guanming He

Guanming He

Durham University

Risy Lu

University of Warwick

Helen Ren

University of Liverpool; University of Warwick, Warwick Business School

Date Written: February 13, 2017

Abstract

Whether financial analysts play an effective role as information intermediaries and monitors has triggered a wide spread of debate among academics and practitioners to date. We complement this debate by investigating the association between analyst coverage and firm-specific future stock price crash risk. Using a large sample of U.S. public firms and the crash risk measure of Hutton et al. (2009), we find strong and robust evidence that a high level of analyst coverage is associated with lower future stock price crash risk, which offers support for the view that analysts serve positive roles as information intermediaries and monitors in the stock markets. We also find that the negative association between analyst coverage and stock price crash risk is stronger for firms that have high financial opacity. Additional analysis reveals that analyst forecast pessimism is negatively associated with future crash risk. Our study is thus of interest to investors who seek analyst reports for their investment decision-making. Also, our findings have some other important implications for practitioners, given the economic and welfare consequences of stock price crashes. Specifically, market participants can use analyst coverage as an indicator to assess future stock price crash risk, as well as the likelihood and extent of insiders’ bad news hoarding that results in crash risk; this is particularly relevant to investors for their portfolio investment decisions and to suppliers and creditors who monitor their clients’ creditworthiness.

Keywords: analyst following; stock price crashes; information intermediary; monitoring; financial opacity

JEL Classification: G14; G29

Suggested Citation

He, Guanming and Bai, Lu and Ren, Mengbing, Analyst Coverage and Future Stock Price Crash Risk (February 13, 2017). Journal of Applied Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3333715

Guanming He (Contact Author)

Durham University ( email )

Durham
United Kingdom

Lu Bai

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Mengbing Ren

University of Liverpool ( email )

United Kingdom

University of Warwick, Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

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