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

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. The increase in risk is stronger in more opaque firms, and it is due to managerial risk-taking actions, such as investing firm assets in higher-risk bonds. Results are driven by firms with stronger managerial risk-taking compensation incentives. Our study highlights the importance of stock analysts in discouraging excessive 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: 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 (February 13, 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