Analyst coverage,executive compensation and corporate risk-taking: Evidence from property–casualty insurance firms |
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Authors: | Tao Chen Shinichi Kamiya Pingyi Lou Andreas Milidonis |
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Institution: | 1. Nanyang Business School, Nanyang Technological University, Singapore, Singapore;2. School of Economics, Fudan University, Shanghai, China;3. Department of Accounting and Finance, School of Economics and Management, University of Cyprus, Nicosia, Cyprus |
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Abstract: | Using an exogenous drop in analyst coverage introduced by broker closures and mergers, we test for the causal impact of analyst coverage on corporate risk-taking, in an opaque industry. We document an increase in risk using several book-based and market-based risk measures, including tail and default risk measures. Results are driven by firms with stronger managerial risk-taking compensation incentives. The increase in risk is stronger in more opaque firms, and firms with weaker policyholder monitoring. Firm risk increases through at least one risk-taking action, such as investing firm assets in higher-risk bonds. Our study highlights the importance of stock analysts in affecting corporate risk-taking, especially in the presence of stronger managerial, compensation risk-taking incentives. |
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Keywords: | analyst coverage compensation incentives insurance risk-taking |
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