What makes a stock risky? Evidence from sell-side analysts' risk ratings

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 1998-2003. We find that the cross-sectional variation in risk ratings is largely explained by variables commonly viewed as risk proxies such as idiosyncratic risk, size, leverage, and accounting losses. We also find that the risk ratings can be used to predict future return volatility controlling for other predictors of future volatility. Both findings establish the important role of financial analysts as providers of information about investment risk.