Equity Analysts and the Market's Assessment of Risk



    1. ESSEC Business School
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    1. The University of Texas at Dallas
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    1. London School of Economics. Accepted by Abbie Smith. We thank Xi Li, Joanna Rolfes, Maria Simatova, Arantza Urra, Nikolaos Voukelatos, and especially Ibon Tamayo and Inma Urra for excellent research assistance. We also thank an anonymous referee, George Benston, Peter de Goeij, Clifton Green, Steven Huddart, Diana Knyazeva, Jon Lewellen, Jim McKeown, Suresh Nallareddy, Henri Servaes, K.R. Subramanyam, Charlie Wasley, Joanna Wu, Jerry Zimmerman, and the seminar participants at Dartmouth College, Emory University, London Business School, London School of Economics, Penn State University, Swansea University, Texas A&M University, Tilburg University, Toulouse Business School, University of Rochester, University of Southern California, University of Warwick, and the 2008 European Finance Association Annual Meeting for helpful comments and discussions.
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The traditional view of equity analysts is that they are a source of new information about future cash flows. We broaden this view by demonstrating that equity analysts are also a substantive source of new information about priced risk. In particular, we document that, when announced, changes in analyst risk ratings distinctly and significantly affect equity returns, and are generally followed by significant changes in Fama–French factor loadings. Also, while less frequent than credit rating changes, equity risk rating changes are timelier, and with a larger overall stock price impact than credit rating changes.