This paper examines how changes in the credibility of financial reporting affect analyst behavior. Using a sample of restatement firms experiencing a substantial change in credibility over 1997–2006, we document that restatements have a long‐lived effect on analyst behavior and that analysts differentiate between restatements caused by irregularities and those caused by errors. We find that while irregularity restatement firms exhibit a reduction in analyst coverage and forecast accuracy and an increase in forecast dispersion in the post‐restatement period, other restatement firms exhibit only an increase in forecast error. Finally, we find evidence to suggest that remedial actions reduce the effect of irregularity restatements on analyst behavior. Overall, these results are consistent with the notion that restatements affect analyst behavior in forming judgements regarding subsequent earnings announcements.

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This study investigates whether firms continue to use tax reserves to achieve financial reporting objectives in the post-FIN 48 period and the effect of auditor-provided tax services on earnings management through tax reserves. Three types of earnings management incentives are considered in this study: meeting or beating the consensus forecasts, income smoothing, and taking an "earnings bath." The analyses yield evidence that only non-large firms manipulate tax reserves to meet/beat earnings forecast in the post-FIN 48 period; however, tax reserves are still utilized by both large and non-large firms to smooth earnings. Moreover, evidence is provided that the auditor who provides more tax services facilitates large firms' earnings smoothing in the post-FIN 48 period, implying independence impairment. But this behavior does not exist within non-large firms, arguably because the auditor does not compromise independence for less important clients.

SUMMARY Common ownership (i.e., financial institutions’ block holding stock in industry rivals) and its implications for investors are matters of current interest and debate (Securities and Exchange Commission (SEC) 2018). Motivated by this debate and the salience of common ownership, we investigate whether and how auditors price common ownership. Consistent with the notion that common ownership improves monitoring, we find common ownership is related to lower audit fees (about 6 percent lower). Further, we find that the reduction in audit fees is more pronounced for companies whose common owners (1) have stronger incentives to monitor and (2) have “scale” in monitoring. Using path analysis, we find common ownership contributes to lower audit fees through improved earnings quality. Collectively, our findings speak to the effect of monitoring mechanisms from common ownership and are of potential interest to investors and the SEC as they attempt to assess the broader implications of common ownership. Data Availability: All data used in the paper are publicly available from sources cited in the paper. JEL Classifications: M4; M42.