The effect of analyst coverage on accounting conservatism

Jerry Sun (Odette School of Business, University of Windsor, Windsor, Canada)
Guoping Liu (Ted Rogers School of Management, Ryerson University, Toronto, Canada)

Managerial Finance

ISSN: 0307-4358

Publication date: 31 January 2011

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.

Keywords

Citation

Sun, J. and Liu, G. (2011), "The effect of analyst coverage on accounting conservatism", Managerial Finance, Vol. 37 No. 1, pp. 5-20. https://doi.org/10.1108/03074351111092111

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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