“ Analyst Coverage and Earnings Management ” on

This study investigates the effect of analyst coverage on both accrual-based and real earnings management. Regarding accrual-based earnings management, I find that firms followed by more analysts engage in less accruals management and that more experienced analysts seem to be more effective in constraining accruals management, consistent with the role of analysts as external monitors to managers. In addition, I find that the effect of analyst coverage concentrates on firms with income-increasing discretionary accruals and that such effect is stronger for firms who narrowly meet or beat earnings targets with positive discretionary accruals, while the latter results could be due to stronger monitoring effect of analysts or due to firms' switching from accruals management to expectations management. Finally, I find that analyst coverage affects neither the magnitude nor the occurrence of real earnings management, failing to support the monitoring effect hypothesis of the original study.