Using Abnormal Analyst Coverage to Unlock New Evidence on Stock Price Crash Risk
47 Pages Posted: 10 Apr 2019
Date Written: March 24, 2019
We employ a characteristic-based model to decompose total analyst coverage into abnormal and expected components and show that abnormal coverage contains valuable information about individual firm ex-ante crash risk (proxied by implied volatility smirk from options data). Specifically, one standard deviation increase in unexpected or abnormal coverage is associated with a 5.5% decrease in the ex-ante crash risk. The abnormal coverage signal is more useful in firms with a more transparent information environment, proxied by lower analyst dispersed opinions, lower financial opacity, and more comparable financial statements. Collectively, the results suggest that options market investors utilise abnormal coverage to identify and assess crash risk of mispriced firms.
Keywords: abnormal analyst coverage, ex-ante crash risk
JEL Classification: G12, M41
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