Earnings Management and Analyst Following: A Simultaneous Equations Analysis

Authors

  • Yongtao Hong,

  • Fariz Huseynov,

  • Wei Zhang

    Search for more papers by this author
    • Yongtao Hong is an Assistant Professor of Accounting in the College of Business at North Dakota State University in Fargo, ND. Fariz Huseynov is an Assistant Professor of Finance in the College of Business at North Dakota State University in Fargo, ND. Wei Zhang is an Associate Professor of Finance in the College of Business at North Dakota State University, in Fargo, ND.


  • We are grateful to Raghu Rau (Editor) and an anonymous referee for their excellent comments and suggestions. We acknowledge Thomson Financials for providing analyst coverage data through I/B/E/S as part of a broad academic program to encourage earnings expectation research. We also thank Heidi Mann for excellent copy editing.

Abstract

We use a simultaneous equations system to examine the relationship between earnings management and analyst following. We find that analysts’ decisions to follow firms and managerial decisions to manage earnings are jointly determined. Firms with lower levels of accrual-based earnings management offer a better information environment to attract analyst following. Analyst following, in turn, has important monitoring effects on managerial behavior and results in lower levels of both accrual-based and real earnings management. The information intermediary effect on analyst following is much weaker for expected “suspect firms” that manage their earnings continuously.

Ancillary