Why Do Financial Analysts Strive to Be Irrelevant? Career Concerns and Endogenous Coverage Termination

Marco Navone and Fernando Zapatero

No 1507, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: In this paper we investigate the negative relationship between analysts’ coverage and stocks idiosyncratic volatility. While prior research argues that analysts cause the low level of idiosyncratic risk because they lack access to firm-specific information we hypothesize that the causal relation goes in the opposite direction. Specifically we argue that due to reputational concerns analysts avoid covering stocks with high levels of specific risk. Using three novel quasi-natural experiments we show that analysts’ coverage drops after an exogenous increase in idiosyncratic volatility. We also show that coverage increases after an exogenous decrease of specific risk and that an exogenous decrease in the number of analysts covering a firm lead to a decrease firm-specific information. Looking at individual analysts’ characteristics we show that the probability of dropping coverage after an increase in idiosyncratic risk is higher for younger analysts, analysts with lower reputation and lower risk aversion.

Keywords: Financial Analysts; Career Concerns; Idiosyncratic Risk (search for similar items in EconPapers)
JEL-codes: G11 G14 G23 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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