Analysts’ optimism and stock crash risk

Abstract

PurposeThe purpose of this paper is to investigate whether analysts’ optimism affects the stock crash risk.Design/methodology/approachThe sample covers 49,246 firm-year observations for the period between 1995 and 2015. The authors use OLS regressions with firm and year fixed effects for analyses.FindingsThe study finds that there is a positive association between analysts’ optimism and stock crash risk. Such a positive impact is more pronounced for firms with opaque information environment and for analysts who are considered ex ante credible.Research limitations/implicationsThe results indicate that analysts’ optimism can be an important source of stock crash risk.Practical implicationsThe findings can be useful for informational users of analyst reports. Given that information provided by analysts might have negative consequences, the empirical results can be useful in assessing future stock return behaviors.Originality/valueThis paper has the potential to shed light on the large literature of crash risk. Prior studies suggest that crash is driven by the agency tension between shareholders and managers. It remains possible that crashes could be caused by overpriced stocks in the absence of bad news hoarding. The paper investigates crash from a perspective, financial analysts, that is underexplored.