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Does Analyst Following Curb Earnings Management?
(), Yuan DING, Thomas JEANJEAN and Hervé STOLOWY
Abstract: We investigate the role of analyst following as a
monitoring device reducing earnings management. We find strong evidence
that analysts are more effective monitors in transparent environments than
in opaque environments. In a sample of 51,401 observations for 10,866
non-financial firms in 26 countries from 1994 to 2002, we find that the
more transparent the country, the stronger the reduction in earnings
management activity associated with analyst following. We also find that
firms in transparent countries use short-term earnings management
techniques to reach the consensus analyst forecast. Taken together, our
findings suggest that while analyst following acts as a curb on the most
visible forms of earnings management in transparent countries, it also
encourages more subtle, short-term forms of earnings management to reach
the analyst consensus. In transparent countries monitoring effectiveness
more than offsets consensus fixation. In opaque countries, analyst
following does not act as a curb on total earnings management, but neither
does it create any short-term pressure to manage earnings. Our results are
robust to (1) our measure of transparency, (2) reverse causality checks and
(3) our choice of measure of earnings management.
Keywords: analyst following; earnings management; international comparison; (follow links to similar papers)
JEL-Codes: G31; (follow links to similar papers)
47 pages, March 11, 2005
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