Analyst coverage and default risk

This study explores the causal effect of analyst coverage on corporate default risk. Using the exogenous drop of analyst coverage due to brokerage mergers and closuresas a natural experiment, we observe an increase in the probability of default following the coverage termination. This result is driven by firms having large asymmetric information problems (few analysts following and intangible -intensive firms), higher financing constraints, lower stock liquidity and firms operating in countries with a larger domestic stock market size. We explore agency costs and stock liquidity as potentialchannels, finding empirical support only for this latter. Finally, we observe that firms react to the analyst loss by adopting conservative investment and financing policies in the aim to mitigate the increase in default risk.