Analyst Coverage, Executive Compensation and Corporate Risk-Taking: Evidence from Property–Casualty Insurance Firms
2023 · Published in Journal of Risk and Insurance 90(4): 899–939 · DOI 10.1111/jori.12437
In one sentence
When property–casualty insurers lose analyst coverage, they take more risk, especially where managers’ pay rewards risk-taking.
Summary
Using exogenous drops in analyst coverage caused by broker closures and mergers, the paper tests the causal effect of analyst coverage on risk-taking in an opaque industry, property–casualty insurance. After losing coverage, insurers’ risk increases on several book-based and market-based measures, including tail and default risk. The results are driven by firms whose managers have stronger risk-taking incentives in their compensation, and they are stronger for more opaque firms and firms with weaker policyholder monitoring. Risk rises through at least one risk-taking action, such as investing in higher-risk bonds.
Abstract as published
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.
Citation
Tao Chen, Shinichi Kamiya, Pingyi Lou, Andreas Milidonis (2023). Analyst coverage, executive compensation and corporate risk‐taking: Evidence from property–casualty insurance firms. Journal of Risk and Insurance, 90(4), 899–939. https://doi.org/10.1111/jori.12437
BibTeX
@article{chen2023analyst,
title = {{Analyst coverage, executive compensation and corporate risk‐taking: Evidence from property–casualty insurance firms}},
author = {Tao Chen and Shinichi Kamiya and Pingyi Lou and Andreas Milidonis},
journal = {Journal of Risk and Insurance},
year = {2023},
volume = {90},
number = {4},
pages = {899--939},
doi = {10.1111/jori.12437}
}