What Makes a Stock Risky? Evidence from Sell-Side Analysts' Risk Ratings

What Makes a Stock Risky? Evidence from Sell-Side Analysts' Risk Ratings
Author(s): Markov, Stanimir and Lui, Daphne and Tamayo, Ane
Year: 2005
Paper Number: GBS-ACC-2005-006
Goizueta Department: Accounting

Abstract

Using a sample of 3,270 analysts' research reports issued in the period January 1998 through June 1998, we examine the determinants and the informativeness of financial analysts risk ratings. We find that the cross-sectional variation in risk ratings is largely explained by variables commonly viewed as risk proxies such as idiosyncratic risk, size, and leverage. We also find that the risk ratings can be used to predict future return volatility controlling for other predictors of future volatility. Both findings establish the important role of financial analysts as providers of information about investment risk.