Accruals Quality and Analyst Coverage

42 Pages Posted: 15 Sep 2006

See all articles by Minsup Song

Minsup Song

Sogang University

Mary Harris Stanford

Texas Christian University - Department of Accounting

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: December 2006

Abstract

We examine the relation between analyst coverage and accruals quality. Because accrual accounting requires managers to estimate the future economic consequences of current events, accruals reflect estimation errors and potential managerial opportunism. This may lower accruals quality and provide noisier signals of firm value. If investors turn to analysts for supplemental information, then demand for analyst services will increase as accruals quality decreases. Because lower accruals quality increases the value of their services, analysts have greater incentives to cover firms with low accruals quality. Our results support these hypotheses. Although firms with low accruals quality have greater analyst coverage and forecast revisions, we also find they have larger forecast errors and dispersion. Thus, analysts are unable to fully resolve the uncertainty in accruals. This is consistent with accruals reflecting information risk.

Keywords: Analyst Forecasts, Analyst Coverage, Accruals Quality

JEL Classification: C21, C22, G10, G12, G29, M41, M43

Suggested Citation

Song, Minsup and Stanford, Mary and Lobo, Gerald J., Accruals Quality and Analyst Coverage (December 2006). Available at SSRN: https://ssrn.com/abstract=930426 or http://dx.doi.org/10.2139/ssrn.930426

Minsup Song (Contact Author)

Sogang University ( email )

Palaus Hall 802, Sogang Business School
1 Shinsoo-Dong, Mapo-Gu
Seoul
Korea, Republic of (South Korea)
82-2-705-8855 (Phone)

Mary Stanford

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7483 (Phone)

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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