A Study On The Impact Of Analyst Coverage On Earnings Management Of Listed Companies

Stories of upward or downward earnings revisions by management of listed companies around the world are played out almost daily,and earnings management remains an important issue currently plaguing the quality of information and transparency of listed companies.There are two main ways for listed companies to engage in earnings management: accrual earnings management and real earnings management.Accrual earnings management is mainly reflected in the manipulation of profits through accounting policies and changes in accounting estimates,which usually does not affect the normal management of enterprises;while real earnings management is a way to manipulate profits to achieve profit target by arranging real trading activities or controlling the timing of transactions.It is not easy to be identified by investors and is more hidden.It does not violate accounting standards,but it directly damages the future profitability and value of enterprises.For example,NANHUA BIO-MEDICINE has had many experiences of achieving profitability through earnings management to remove its ST cap.In 2016,the board of directors meeting voted unanimously for a resolution to change accounting estimates,significantly lowered the accrual ratio of receivables and other receivables for accrued earnings management,and also achieved real earnings management by transferring some idle assets to related parties to increase revenue.Due to the existence of information asymmetry,investors are at an information disadvantage in the capital market,so it is often difficult to discover the traps behind the earnings of listed companies.For the sustainable and healthy development of the capital market,especially for the emerging market like China,it is necessary to reduce the earnings management behavior of listed companies and improve the information transparency of listed companies.Some studies have shown that analysts’ interpretation and prediction of listed companies’ information can influence investors’ behavior,and management also considers analysts as an important factor affecting their companies’ share prices,so it is reasonable to suspect that analysts can influence listed companies’ management’s earnings management behavior.There are currently two main conflicting theories of the influence of analysts on corporate earnings management: Supervisory theory and Pressure theory.Do analysts act as external supervisors to reduce managers’ earnings management behavior,or do they exert excessive pressure on managers causing them to engage in more earnings management to accommodate analysts’ forecasts? Yu(2008)found through empirical research that analyst tracking can detect management fraud and reduce the degree of information asymmetry,thus easing the principal-agent problem and verifying the role of analysts’ external supervisors.In addition,Ding Fangfei(2019)find that analysts have a "behavioral value" monitoring function,and their attention can inhibit management’s real earnings management behavior.In contrast,Sun and Liu(2015)found that managers of companies with high analyst coverage may have greater motivation to achieve or exceed analysts’ earnings forecasts and conduct more real earnings management.Given these two contradictory theories,this paper distinguishes between the two means of earnings management and investigates the impact of information intermediaries,i.e.,analysts,on corporate governance from the perspective of external governance.Since China’s capital market is still imperfect,it is necessary to learn from advanced international experience,especially from developed countries like the U.S.Therefore,this paper integrates domestic and international literature and investigates the relationship between analyst coverage and earnings management using a sample of U.S.listed companies from 2001 to 2019.It is found that there is a significant negative relationship between analyst coverage and earnings management.In addition,existing research suggests that analysts tend to track companies with better information environments,implying that analysts may intentionally choose companies with lower levels of earnings management to track.To address the possible endogeneity problem between analyst tracking and earnings management caused by reverse causality,this paper employs two-stage least squares(2SLS)to mitigate the endogenous problem by constructing the instrumental variable(IV)to ensure the robustness of the results.Finally,because the resources of securities analysts are certain,to improve the efficiency of the capital market and promote the high-quality development of listed companies,based on the findings of the basic study,this paper also investigates the moderating effects of firm size and CEO compensation on the relationship between analyst coverage and earnings management.