Analyst Coverage and Future Stock Price Crash Risk

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. We complement this debate by investigating the association between analyst coverage and firm-specific future stock price crash risk. Using a large sample of U.S. public firms and the crash risk measure of Hutton et al. (2009), we find strong and robust evidence that a high level of analyst coverage is associated with lower future stock price crash risk, which offers support for the view that analysts serve positive roles as information intermediaries and monitors in the stock markets. We also find that the negative association between analyst coverage and stock price crash risk is stronger for firms that have high financial opacity. Additional analysis reveals that analyst forecast pessimism is negatively associated with future crash risk. Our study is thus of interest to investors who seek analyst reports for their investment decision-making. Also, our findings have some other important implications for practitioners, given the economic and welfare consequences of stock price crashes. Specifically, market participants can use analyst coverage as an indicator to assess future stock price crash risk, as well as the likelihood and extent of insiders' bad news hoarding that results in crash risk; this is particularly relevant to investors for their portfolio investment decisions and to suppliers and creditors who monitor their clients' creditworthiness