Consequences of firm-specific stock price crashes on analyst forecasts: Evidence from China

Abstract

AbstractThe phenomenon of stock price crash events (SPCs) has always attracted market attention, but existing research mainly focuses on its causes or determinants and rarely examines the consequences of SPCs. This study aims to fill this gap by examining the consequences of firm-specific stock price crash events (SPCs) on analyst forecast accuracy. Using the sample of analysts and listed companies from 2001 to 2020 and employing a difference-in-differences design, we find that after the company’s stock price crashed, the analyst forecast error decreased and the accuracy increased. For analysts who have not conducted site visits before SPC, and have no geographical advantages, this effect is more obvious, thus validating our hypothesis following analyst attention theory. Additional analysis shows that SPCs stimulate forecast accuracy more significantly for lowly-reputed analysts than for highly-reputed analysts. Channel analysis documents that, for the aforementioned group of analysts, the enhancement effect of SPCs on analyst forecasts is mediated by analyst effort increasing. This study adds to the evidence that SPCs bring positive externalities from the analyst perspective, that is, SPCs attract the attention of some analysts and improve their forecast accuracy. This study also enhances our understanding of analyst behavior under uncertainty, finally enriching the literature on the determinants of analyst forecast accuracy.