Analyst coverage and future stock price crash risk

Guanming He (Durham University Business School, Durham University, Durham, UK)
Lu Bai (Warwick Business School, University of Warwick, Coventry, UK)
Helen Mengbing Ren (Warwick Business School, University of Warwick, Coventry, UK)

Journal of Applied Accounting Research

ISSN: 0967-5426

Publication date: 11 February 2019

Abstract

Purpose

Whether financial analysts play an effective role as information intermediaries and monitors has triggered a wide spread of debate among academics and practitioners to date. The purpose of this paper is to complement this debate by investigating the association between analyst coverage and firm-specific future stock price crash risk.

Design/methodology/approach

Regression analysis is based on a large sample of US public firms and the crash risk measure of Hutton et al. (2009). Potential endogeneity concerns are alleviated by restricting the sample period to the post-Regulation-FD period and conducting an analysis of the impact threshold for a confounding variable method per Larcker and Rusticus (2010).

Findings

Evidence reveals that a high level of analyst coverage is associated with lower future stock price crash risk. Furthermore, the negative association between analyst coverage and stock price crash risk is stronger for firms that have high financial opacity. Additionally, analyst forecast pessimism is negatively associated with future crash risk.

Research limitations/implications

Our research provides evidence in support for the view that financial analysts play an active information intermediary role in a way that increases information transparency of a firm and reduces its crash risk. Also, our study offers support for the view that analysts perform an effective monitoring role in a way that constraints management’s bad news hoarding activities and reduces future crash risk.

Practical implications

This study is of interest to investors who seek analyst reports for their investment decision making and for information providers who demand external financing. The findings of this study also have some other important implications for practitioners, given the economic and welfare consequences of stock price crashes.

Originality/value

This study offers support for the view that analysts serve positive roles as information intermediaries and monitors in the US stock market.

Keywords

Citation

He, G., Bai, L. and Ren, H. (2019), "Analyst coverage and future stock price crash risk", Journal of Applied Accounting Research, Vol. 20 No. 1, pp. 63-77. https://doi.org/10.1108/JAAR-09-2017-0096

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Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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