Do analysts and long-term institutional investors influence a firm's distress risks?

This paper examines whether and how coverage by analysts influence financial distress risks among firms. Results using Chinese A-share firms’ data over the 2007–2022 period suggest that broader analyst coverage can reduce distress risks. These findings remain robust across multiple sensitivity tests. Moreover, long-term institutional investors, in conjunction with analysts, can further reduce financial distress risks. Mechanism analysis reveals that analyst coverage helps to curb distress risks primarily by enhancing information transparency and strengthening external oversight. Additional heterogeneity tests show that these effects are particularly important for firms facing weaker audit environments and those without established banking relationships. Analyst coverage also serves to inform external stakeholders on a firm’s financial situation (the spotlight effect) and provides value by increasing information flow and strengthening governance mechanisms. Results also show that star analysts and not non-star analysts, reduce distress risks. Finally, analyst coverage also appears to enhance firm value by mitigating distress risks. Overall, study results indicate that analyst coverage and long-term institutional investors can reduce distress risks.