Effect of Analyst Coverage on Downside Risk : Evidence from Earthquake

This study investigates the moderating effect of managerial sentiment on the relation between analyst coverage and downside risk. Using the earthquake as a negative shock to managerial sentiment, we find that analyst coverage is negatively correlated with downside risk, however, this relationship would shift from negative to positive after the earthquake shock. And the paper attributes this finding to the increased analyst earnings pressure for pessimistic managers. In cross-sectional analysis, this paper finds the effect is stronger for the corporate with less market competition, lower levels of institutional ownership, or less powerful managers. We also find these findings are unlikely to be explained by "big bath" behavior or economic damage. Collectively, these results contribute to the literature on the economic consequence of earthquake and managerial sentiment