Document Type

Article

Publication Date

2011

Publication Title

Managerial Finance

Volume

37

Issue

1

First Page

5

Last Page

20

DOI

10.1108/03074351111092111

Keywords

Accounting, Corporate governance, Financial analysis, Financial reporting

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.

Comments

The article available for download is a post print. The definitive version is published in Managerial Finance and is available here. Copyright (2012) Emerald Group Publishing Limited.

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