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Analyst Coverage and Real Earnings Management: Quasi-Experimental Evidence


Irani, Rustom M.; Oesch, David (2016). Analyst Coverage and Real Earnings Management: Quasi-Experimental Evidence. Journal of Financial and Quantitative Analysis, 51(02):589-627.

Abstract

We study how securities analysts influence managers’ use of different types of earnings management. To isolate causality, we employ a quasi-experiment that exploits exogenous reductions in analyst following resulting from brokerage house mergers. We find that managers respond to the coverage loss by decreasing real earnings management while increasing accrual manipulation. These effects are significantly stronger among firms with less coverage and for firms close to the zero-earnings threshold. Our causal evidence suggests that managers use real earnings management to enhance short-term performance in response to analyst pressure, effects that are not uncovered when focusing solely on accrual-based methods.

Abstract

We study how securities analysts influence managers’ use of different types of earnings management. To isolate causality, we employ a quasi-experiment that exploits exogenous reductions in analyst following resulting from brokerage house mergers. We find that managers respond to the coverage loss by decreasing real earnings management while increasing accrual manipulation. These effects are significantly stronger among firms with less coverage and for firms close to the zero-earnings threshold. Our causal evidence suggests that managers use real earnings management to enhance short-term performance in response to analyst pressure, effects that are not uncovered when focusing solely on accrual-based methods.

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Citations

3 citations in Web of Science®
4 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2016
Deposited On:15 Mar 2017 11:33
Last Modified:15 Mar 2017 11:33
Publisher:Cambridge University Press
ISSN:0022-1090
Publisher DOI:https://doi.org/10.1017/S0022109016000156
Other Identification Number:merlin-id:14676

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