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The effect of analyst coverage on accounting conservatism

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Author Info

  • Jerry Sun
  • Guoping Liu
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    Abstract

    Purpose – The purpose of this paper is to examine whether high analyst coverage increases or decreases accounting conservatism. Design/methodology/approach – Sample firms were selected from the Compustat and I/B/E/S databases for years 1989-2006. The authors used both accrual-based and market-value-based measures of accounting conservatism, also the extent to which negative cash flow from operations is more timely recognized via accruals than positive cash flow from operations to measure accounting conservatism. The regression analyses are conducted to test the hypotheses. Findings – Strong evidence was found that analyst coverage is positively associated with accounting conservatism. The results suggest that firms choose more conservative accounting methods when they are followed by more analysts than when they are followed by fewer analysts. The results are robust to a battery of sensitivity analyses. Originality/value – This paper sheds light on how analyst coverage affects firms' accounting choices and extends the limited research on the monitoring role of analyst coverage. The findings are consistent with the notion that analyst coverage plays an important corporate governance role in the financial reporting process. This paper also adds to the literature on the economic determinants of accounting conservatism, and provides some implications for practitioners.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=0307-4358&volume=37&issue=1&articleid=1896577&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 37 (2011)
    Issue (Month): 1 (January)
    Pages: 5-20

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    Handle: RePEc:eme:mfipps:v:37:y:2011:i:1:p:5-20

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    Web page: http://www.emeraldinsight.com

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    Related research

    Keywords: Accounting; Corporate governance; Financial analysis; Financial reporting;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Zmijewski, Mark E. & Hagerman, Robert L., 1981. "An income strategy approach to the positive theory of accounting standard setting/choice," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 129-149, August.
    2. Ryan Lafond & Sugata Roychowdhury, 2008. "Managerial Ownership and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 101-135, 03.
    3. Harrison Hong & Terence Lim & Jeremy C. Stein, 2000. "Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies," Journal of Finance, American Finance Association, vol. 55(1), pages 265-295, 02.
    4. Chung, Hyeesoo H. & Wynn, Jinyoung P., 2008. "Managerial legal liability coverage and earnings conservatism," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 135-153, September.
    5. Juan Manuel Garcia Lara & Beatriz Garcia Osma & Fernando Penalva, 2007. "Board of Directors' Characteristics and Conditional Accounting Conservatism: Spanish Evidence," European Accounting Review, Taylor & Francis Journals, vol. 16(4), pages 727-755.
    6. Yu, Fang (Frank), 2008. "Analyst coverage and earnings management," Journal of Financial Economics, Elsevier, vol. 88(2), pages 245-271, May.
    7. Jenkins, David S. & Velury, Uma, 2008. "Does auditor tenure influence the reporting of conservative earnings?," Journal of Accounting and Public Policy, Elsevier, vol. 27(2), pages 115-132.
    8. Ahmed, Anwer S. & Duellman, Scott, 2007. "Accounting conservatism and board of director characteristics: An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 411-437, July.
    9. Xin Chang & Sudipto Dasgupta & Gilles Hilary, 2006. "Analyst Coverage and Financing Decisions," Journal of Finance, American Finance Association, vol. 61(6), pages 3009-3048, December.
    10. Zhang, Jieying, 2008. "The contracting benefits of accounting conservatism to lenders and borrowers," Journal of Accounting and Economics, Elsevier, vol. 45(1), pages 27-54, March.
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