Using Abnormal Analyst Coverage to Unlock New Evidence on Stock Price Crash Risk

47 Pages Posted: 10 Apr 2019

See all articles by Hasibul Chowdhury

Hasibul Chowdhury

University of Queensland - Business School

Robert W. Faff

University of Queensland

Khoa T.A. Hoang

University of Queensland - Business School

Date Written: March 24, 2019

Abstract

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

Suggested Citation

Chowdhury, Hasibul and Faff, Robert W. and Hoang, Khoa T.A., Using Abnormal Analyst Coverage to Unlock New Evidence on Stock Price Crash Risk (March 24, 2019). Available at SSRN: https://ssrn.com/abstract=3364003 or http://dx.doi.org/10.2139/ssrn.3364003

Hasibul Chowdhury

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Khoa T.A. Hoang (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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