The recipient of the 2024 Robert C. Witt Award was Tao Chen, Shinichi Kamiya, Pingyi Lou, and Andreas Milidonis for “Analyst coverage, executive compensation and corporate risk-taking: Evidence from property–casualty insurance firms,” December 2023, Volume 90, Issue 4, pages 899-939.
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.