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


  • We thank Teresa Dau, Arantza Urra, and especially, Inma Urra for excellent research assistance. We also thank Ray Ball (the editor), Sudipta Basu, Larry Brown, Marty Butler, Francesca Cornelli, Miles Gietzmann, Wayne Guay, Connie Kertz, Michael Kimbrough, Grace Pownall, Henri Servaes, Theodore Sougiannis, Greg Waymire, an anonymous referee, and the seminar participants at Emory University, The Hong Kong University of Science and Technology, IESE, Instituto de Empresa, London Business School, London School of Economics, Singapore Management University, Texas A&M University, Tulane University, Universidad Carlos III, The University of Arizona, The University of Texas at Dallas, The 2006 University of Minnesota Empirical Accounting Conference, the 5th Accounting Symposium at London Business School, the 16th Annual Conference on Financial Economics and Accounting at the University of North Carolina, and the 29th Annual Congress of the European Accounting Association in Dublin for their helpful comments. We thank the Research and Materials Development Funds at London Business School for financial support.


We examine the determinants and the informativeness of financial analysts' risk ratings using a large sample of research reports issued by Salomon Smith Barney, now Citigroup, over the period 1997–2003. We find that the cross-sectional variation in risk ratings is largely explained by variables commonly viewed as measures of risk, such as idiosyncratic risk, size, book-to-market, and leverage. In addition, earnings-based measures of risk, such as earnings quality and accounting losses, also contribute to explaining the cross-sectional variation in the risk ratings. Finally, we document that the risk ratings can be used to predict future return volatility after controlling for other predictors of future volatility. We conclude that analysts play an important role as providers of information about investment risk.