Analyst Coverage, Executive Compensation and Corporate Risk-Taking: Evidence From Property-Casualty Insurance Firms

94 Pages Posted: 11 Feb 2021 Last revised: 12 Jan 2024

See all articles by Tao Chen

Tao Chen

Nanyang Business School, Nanyang Technological University

Shinichi Kamiya

Nanyang Business School, Nanyang Technological University

Pingyi Lou

Fudan University - School of Economics

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Date Written: June 16, 2023

Abstract

Using an exogenous drop in analyst coverage introduced by broker closures and mergers, we test for the causal impact of analyst coverage on corporate risk-taking, in an opaque industry. We document an increase in risk using several book-based and market-based risk measures, including tail and default risk measures. Results are driven by firms with stronger managerial risk-taking compensation incentives. The increase in risk is stronger in more opaque firms, and firms with weaker policyholder monitoring. Firm risk increases through at least one risk-taking action, such as investing firm assets in higher-risk bonds. Our study highlights the importance of stock analysts in affecting corporate risk-taking, especially in the presence of stronger managerial, compensation risk-taking incentives.

Keywords: Analyst coverage, Risk-taking, Compensation incentives, Insurance

JEL Classification: G22, G32.

Suggested Citation

Chen, Tao and Kamiya, Shinichi and Lou, Pingyi and Milidonis, Andreas, Analyst Coverage, Executive Compensation and Corporate Risk-Taking: Evidence From Property-Casualty Insurance Firms (June 16, 2023). Nanyang Business School Research Paper No. 21-09, Available at SSRN: https://ssrn.com/abstract=3778633 or http://dx.doi.org/10.2139/ssrn.3778633

Tao Chen

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Shinichi Kamiya

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Pingyi Lou

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

HOME PAGE: http://sites.google.com/view/plou002/home

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

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