Using abnormal analyst coverage to unlock new evidence on stock price crash risk

Hasibul Chowdhury, Robert Faff, Khoa Hoang*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

1 Citation (Scopus)
3 Downloads (Pure)

Abstract

We employ a characteristic-based model to decompose total analyst coverage into abnormal and expected components and show that abnormal coverage contains valuable information about firm-level ex ante crash risk (proxied by implied volatility smirk from options data). Specifically, one standard deviation increase in unexpected or abnormal coverage is associated with a 5.5 percent decrease in the ex ante crash risk. The abnormal coverage signal is more useful for firms with a more transparent information environment, proxied by lower probability of informed trading, lower financial opacity, and more comparable financial statements. Moreover, the abnormal coverage effect is stronger for firms followed by analysts who issue more accurate and less dispersed forecasts. Collectively, these results suggest that options market investors utilise abnormal coverage to identify and assess crash risk of mispriced firms.

Original languageEnglish
Pages (from-to)1557-1588
Number of pages32
JournalAccounting and Finance
Volume61
Issue numberS1
Early online date25 Mar 2020
DOIs
Publication statusPublished - Apr 2021
Externally publishedYes

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