Analysts’ Optimism and Stock Crash Risk

Abstract

This paper investigates whether analysts’ optimism affects the stock crash risk. Analysts’ optimism can increase stock crash risk either by inducing overvaluation or by providing managers an opportunity to withhold bad news. Using analysts’ forecast error as a proxy for analysts’ optimism, we find that there is a positive association between analysts’ optimism and stock crash risk. Further, such a positive impact is more pronounced for firms with opaque information environment and for analysts who are considered ex ante credible. In addition, we show that analysts’ optimism does not increase stock crash risk when the prevailing market sentiment is high, lessening the concern that our findings are driven by market overvaluation. Overall, our results indicate that analysts’ optimism can be a source of stock crash risk.

Keywords: analysts’ optimism, stock crash risk, information environment, credibility, market sentiment

JEL Classification: G12, G14