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Analyst Coverage and Real Earnings Management: Quasi-Experimental Evidence

Published online by Cambridge University Press:  02 May 2016

Rustom M. Irani  and
David Oesch
Rustom M. Irani*
Affiliation:
rirani@illinois.edu, University of Illinois, College of Business, Champaign, IL 61820
David Oesch
Affiliation:
david.oesch@business.uzh.ch, University of Zurich, Faculty of Business, Economics and Informatics, Zurich CH-8032, Switzerland.
*
*Corresponding author: rirani@illinois.edu
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Abstract

We study how securities analysts influence managers’ use of different types of earnings management. To isolate causality, we employ a quasi-experiment that exploits exogenous reductions in analyst following resulting from brokerage house mergers. We find that managers respond to the coverage loss by decreasing real earnings management while increasing accrual manipulation. These effects are significantly stronger among firms with less coverage and for firms close to the zero-earnings threshold. Our causal evidence suggests that managers use real earnings management to enhance short-term performance in response to analyst pressure, effects that are not uncovered when focusing solely on accrual-based methods.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 2 , April 2016 , pp. 589 - 627
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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