Analysts’ Textual Tone and Stock Price Crash Risk: Evidence from Analysts’ Reports in Korea

This study investigates whether an optimistic tone in analysts’ reports is linked to future stock price crashes. The findings support this proposition, showing that an optimistic tone is positively associated with future crash risk, suggesting that such optimism may delay the disclosure of negative information, thereby posing risks to investors. Two mechanisms are proposed to explain this relationship: analysts as information mediators and as external monitors. We hypothesize that the association between optimistic tone and crash risk is pronounced in firms with higher information asymmetry and weak corporate governance, where analysts’ roles are crucial. The findings confirm these hypotheses, underscoring the importance of analysts in providing timely bad news and monitoring corporate disclosures to prevent the concealment of negative information. This study contributes to the literature by exploring the relationship between analysts’ report tone and future stock price crash risk, highlighting mechanisms through which optimistic reports increase crash risk, and providing empirical evidence of analysts’ dual role as information intermediaries and external monitors. This research emphasizes the critical function of financial analysts in mitigating the adverse effects of information imbalances, especially for investors in firms with significant information asymmetry or weak governance.