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The effect of analyst coverage on accounting conservatism

Author

Listed:
  • Jerry Sun
  • Guoping Liu

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.

Suggested Citation

  • Jerry Sun & Guoping Liu, 2011. "The effect of analyst coverage on accounting conservatism," Managerial Finance, Emerald Group Publishing, vol. 37(1), pages 5-20, January.
  • Handle: RePEc:eme:mfipps:v:37:y:2011:i:1:p:5-20
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    References listed on IDEAS

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    1. 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, February.
    2. 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.
    3. 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.
    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. 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.
    6. 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.
    7. 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.
    8. Ryan Lafond & Sugata Roychowdhury, 2008. "Managerial Ownership and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 101-135, March.
    9. repec:bla:joares:v:38:y:2000:i:1:p:127-148 is not listed on IDEAS
    10. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
    11. Yu, Fang (Frank), 2008. "Analyst coverage and earnings management," Journal of Financial Economics, Elsevier, vol. 88(2), pages 245-271, May.
    12. 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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    Cited by:

    1. Jiandong Chen & Rong Ding & Wenxuan Hou & Sofia Johan, 2016. "Do Financial Analysts Perform a Monitoring Role in China? Evidence from Modified Audit Opinions," Abacus, Accounting Foundation, University of Sydney, vol. 52(3), pages 473-500, September.

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