Analyst Coverage and Earnings Management

55 Pages Posted: 27 Oct 2005 Last revised: 4 Feb 2009

See all articles by Frank Yu

Frank Yu

China Europe International Business School

Date Written: 2008

Abstract

What is the role of information intermediaries in corporate governance? This paper examines equity analysts' influence on managers' earnings management decisions. Do analysts serve as external monitors to managers, or do they put excessive pressure on managers? Using multiple measures of earnings management, I find that firms followed by more analysts manage their earnings less. To address potential endogeneity problem of analyst coverage, I use two instrumental variables that are based on change in broker size and on firm's inclusion in the S&P 500 index, and find that the result is robust. Finally, given the size of coverage, analysts from top brokers and more experienced analysts have stronger effect against earnings management.

Keywords: Earnings management, financial analyst, information intermediary, corporate governance

JEL Classification: G3, M4, G24

Suggested Citation

Yu, Fang, Analyst Coverage and Earnings Management (2008). Journal of Financial Economics, Vol. 88, pp. 245-271, 2008. Available at SSRN: https://ssrn.com/abstract=828484

Fang Yu (Contact Author)

China Europe International Business School ( email )

669 Hongfeng Road
Pudong
Shanghai, 201206
China

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