Analyst independence and earnings management

Abstract

We examine whether analyst independence contributes to analysts’ monitoring role in deterring accruals earnings management. We first report a negative association between earnings management and the ratio of independent analysts to brokerage analysts covering a firm. Next, through the lens of the promotion of independent sell‐side research institutions by the 2003 Global Research Analyst Settlement, we document a significant decrease in earnings management on firms affected by the Global Settlement's mandate for time‐limited support to back independent research institutions. Additionally, we find that, as the aforementioned support ended, the extent of monitoring effectiveness reverted to a level indistinguishable from that before the Global Settlement. Finally, using closures and mergers of independent research institutions as a quasi‐natural experiment, we provide corroborating evidence consistent with analyst independence leading to more effective monitoring.

Analyst coverage and real earnings management: Does IFRS adoption matter? UK evidence

“…We apply per-industry per-year cross-sectional regressions for estimation of which is specified as follows: in which represents discretionary expenses, and represents lagged sales. Abnormal discretionary expenses, is defined as the difference between the values given by Model [ 2 ] and the actual values. Similar to CFO , greater residual value for suggests greater levels of earnings management.…”

“…Neverthless, only a limited number of empirical work has established an association between a firm's real earnings management and security analysts. Previous work has investigated the effect of analysts coverage on accrual earning mangement [ 2 , 3 ]. However, some work has been devoted to examine the effect of analysts coverage on both accrual and real earning management [ 4 , 5 ].…”

How to Make Long-Term Investments in a Stock Market? A Generic Strategy for Investors

“…External monitoring from stakeholders such as institutional investors, financial analysts, and creditors would help restrain managerial malpractice and/or malfeasance and thereby ameliorate firm performance (Jensen, 1986, Shleifer and Vishny, 1986, and Huang et al, 2023.…”